Home > News > 2004 > September 2004 > The future looks bright for SIPPs
The future looks bright for SIPPs
Pauline Berry from our Liverpool office looks at the future of SIPPs.
As regular readers of this site will know, SIPPs are now into their fifteenth year. Unlike many teenagers, these pension arrangements are showing a level of maturity and foresight well beyond expectations. The market for SIPPs has grown phenomenally since 1989. Whilst the earliest arrangements tended to be set up to receive transfers from SSASs (still a popular source of funds), they are increasingly being set up by the self-employed and senior executives. The big attraction of SIPPs to these individuals is the degree of control over pension investments which they offer.
With continuing volatility in world stock markets, SIPP owners are increasingly using their funds to invest in commercial property. Syndicated property investments are growing in popularity whereby groups of SIPP members combine their funds to invest in a multi-occupancy office block or retail site offering a good stream of rental income and the opportunity for capital growth, all tax free. Some SIPP members prefer this to investing in the pooled funds offered by insurers and other investment managers for the simple reason that they have experience in the commercial property field and can monitor the return on their investment more easily. It is important in these situations to ensure that the member's funds can still be unlocked if needed to pay benefits but this can be achieved if the correct documentation is put in place at the outset.
Pensions simplification in 2006 will undoubtedly affect SIPPs, as it will all other pension schemes. However, the changes look set to make SIPPS remain just as attractive in future as they are today for the following reasons:
- Tax relievable contributions will be much higher after 2006 - consider a 40 year-old self-employed person with earnings of £100,000 per annum - the maximum contribution will increase from £20,000 to £100,000.
- Property of all types will be permitted as an investment, even if it includes or is entirely residential [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
- For the first time, SIPPs will be allowed to make loans to the member's employer of up to 50% of the SIPP assets. Such loans must satisfy certain criteria as to security and the rate of interest chargeable.
- The permitted borrowing limit may initially be lower for new SIPPs but for the more mature arrangements it could be significantly improved - 50% of the value of the SIPP's assets rather than 75% of the value of a property being bought; it might also be possible to utilise borrowing to buy investments other than property (we do not yet know for sure).
- Where a member's tax-free retirement lump sum was certified on transferring into a SIPP and they have not retired before April 2006, their lump sum may well improve. The SIPP administrator will be able to disregard the certificate and pay a lump sum of one quarter of the fund when retirement benefits are to be drawn.
- It will no longer be necessary to buy an annuity at age 75 so the SIPP investments can be retained and used to provide income until death. Even then, it may be possible for the investments to be passed to other SIPPs held by family members with the same provider and used by them for retirement income.
No doubt more will emerge from the Inland Revenue on the simplification issues later this year or early next year. There are currently 18 sets of draft pensions regulations issued by Inland Revenue for consultation and the pensions industry has been asked for comments on these by 5 November 2004. A challenging but exciting time for us all!
To find out more about Self Invested Personal Pensions follow this link.
Pauline Berry, September 2004