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Self
Invested Pension Plans (SIPPs) explained
Although most people have heard of the term SIPP there has been much
confusion about what can or cannot be invested ina Self Invested Pension
Plan and who can benefit from such a scheme.
Although SIPPs are marketed to the mass market they are not usually
suitable for those with pension funds of under £100,000. However, for
those with such a healthy fund SIPPs offer many tax advantages.
In order to entice you to save for retirement the Government offers some
very generous tax advantages:
-
Income Tax relief
at your highest marginal rate i.e. if you are a basic rate tax payer
you will get 20% tax relief. If you are a higher rate tax payer you
will get tax relief at up to 40%.
-
Pensions grow in a
tax efficient way too as you do not pay Capital Gains Tax (CGT)
within the SIPP so gains roll up tax free, with exception of being
unable to claim back tax on dividends.
-
In addition, as
pensions are based under trust law, the assets held within a pension
within the growth stage are free of Inheritance Tax (IHT) in the
event of your death.
In return for these
tax breaks you are limited in how you can access and invest the funds.
You are also limited to the amount you can invest each year and indeed
the total pot of money you can hold n the fund.
The key points
are:
-
Maximum investment
this year £235,000
-
Maximum total fund
holding £1.8 million by 2010
-
There is no access
to the funds until age 55 and then only 25% may be taken as tax free
cash and 75% must be used to provide a taxable income for life.
So what can you invest
in? The main advantage of SIPPs over standard pensions is that they
offer substantially more investment freedom. There was a lot of hype
around 2006, but the government backtracked quickly when they realised a
lot of residential property and luxury cars were being lined up for
pension funds. This media attention has been the cause of much
misinformation around SIPPs.
So now we are in a position where you may invest in a more limited range
of assets, the main one being property. Although you can invest in
commercial property, most people don’t have a fund big enough to buy an
office building or a warehouse, even taking into account you are able to
borrow up to 50% of the size of your fund.
Hotel rooms however are a different proposition altogether. They are
normally more affordable for most investors although the issue here for
most SIPP providers is that investors often try to SIPP their own
holiday home and pass it off as a hotel room.
Hotel units are usually categorised as SIPP compliant if they adhere to
the following statements:
-
The investment is
demonstrably a hotel room.
-
The investor has
no personal usage of their room or any other room. (Unless they pay
normal market rates).
-
The investor gains
no benefit other than from room rental i.e. no income share from
hotel bar or restaurant.
-
The investment is
in no way a residential property.
-
The unit does not
have a kitchen.
As simple as this
sounds it can be a lengthy and soul destroying process to get a SIPP
provider to approve a project. It is therefore always advisable to take
advice from a financial adviser that is used to dealing with such
investments. Other approved assets include:
-
Direct investment
into stocks and shares
-
Direct investment
into authorised UK Unit Trusts, Investment Trusts and many OEICs
-
Direct investment
into futures and options on a recognised futures exchange
-
Insurance company
funds
-
Deposit accounts
in any currency, held with a UK based deposit taker
-
Traded endowment
policies provided they are sold by an authorised person
-
Overseas stocks
and shares quoted on a recognised Stock Exchange
-
Commercial
Property (including land, offices, shops & industrial units)
-
Ground rents (related
to commercial property only).
-
Unlisted Shares (subject
to certain conditions)
StayInvest currently has a
number of projects which are available to purchase through a SIPP. This
means you may be able to consider such an investment with funds you had
previously not considered. To discuss current SIPPable projects, please
contact us.
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