For more than 80 years, valuable tax relief has been available for individuals and companies willing to put money aside in a pension scheme. Pension savings offer significant tax advantages, including:
- pension contributions are deductible against income or corporation tax
- investment income and capital gains, inside the pension scheme, roll-up tax-free (although dividends on shares have been taxed since 1997)
- at retirement, part of the pension scheme may be drawn as a tax-free lump sum
- lump sum benefits payable on death before retiral are normally free of inheritance tax
About 30 years ago people started using 'do-it-yourself' company pension arrangements so that they could take advantage of this favourable tax position and yet keep control of the investment of their retirement funds. Personal Pensions were introduced in 1988 and since about 1991 Self-Invested Personal Pensions (SIPPs) have been popular. SIPPs, may invest in commercial property, subject to particular rules set out by HM Revenue & Customs. Many people see the prospect of investing in bricks and mortar for retirement as highly attractive.
Barnett Waddingham has been closely involved with the development of self-administered pension schemes since 1988. If you are considering taking advantage of the opportunities, we hope this page together with our SIPP booklet and companion booklet on Member Directed Pension Schemes which deals with both SSASs and SIPPs will answer many of your questions.
GENERAL
What is the BWSIPP?
The BWSIPP is a registered personal pension arrangement which
benefits from the same favourable tax treatment as any other
registered personal pension in the UK. However, unlike a conventional
insurance company plan, the investment and administration are
“unbundled”. You are free to choose your own investments, although
not all are tax efficient. At retirement your SIPP fund can be applied in
a number of ways to provide you with pension and lump sum benefits.
The main trustee of the BWSIPP is BW SIPP Trustees Limited and all
investments will be held jointly in their name and your name as you are
a joint trustee of the assets in your own fund. You will also be a co-signatory
on your SIPP bank account.
Who can have a BWSIPP?
You can have a BWSIPP regardless of your employment status. A
BWSIPP can also be established for a child under the age of 18 by a
parent or legal guardian. You can make a transfer payment from
another registered pension scheme (subject to certain restrictions) or
make pension contributions.
CONTRIBUTIONS
How much can I contribute?
UK legislation specifies the maximum that you can contribute each tax
year, to all registered pension schemes (including buying life assurance
under a pension plan) without incurring a tax charge. This is 100% of
your earnings, up to a maximum limit known as the Annual Allowance.
The Annual Allowance for tax year 2007/08 is £225,000 gross
(£175,500 net). Contributions to all of your registered pension
schemes that exceed the Annual Allowance will be subject to a tax
charge of 40% of the excess, regardless of the actual rate of tax that
applies to you.
Your contributions to your BWSIPP will be paid net of basic tax rate
and we will reclaim any basic rate tax relief for which you are eligible
from HMRC. This will be credited to the BWSIPP bank account and
invested in line with your wishes. You will need to make a declaration
in your application that you are eligible for tax relief. If you are a higher
rate taxpayer you will need to reclaim the balance of tax relief by
completing a self assessment tax return.
How much can my Employer contribute?
Your employer can also make contributions to your BWSIPP. However
you will be taxed on any sum that takes your total contributions in
each tax year above the Annual Allowance. Also, the eligibility of
employer contributions for tax relief will be subject to local HM
Inspector of Taxes being satisfied they are “wholly and exclusively” for
the purpose of the employer’s business.
Employer contributions are paid on a gross basis. Your employer may
be entitled to receive tax relief on any contributions it pays, as a
business expense, but relief can be spread in certain situations. You
will not normally be taxed on these contributions provided they do not
take your total contributions above the Annual Allowance.
Contributions are only tax efficient if you are under age 75.
You must tell us within 30 days if you are no longer entitled to tax relief
on your contributions.
How can I pay regular contributions?
Regular contributions must be paid by cheque, standing order or bank
transfer and can be increased or decreased at any time without penalty.
When your salary increases you may want to consider increasing your
contributions at the same rate, since they will not usually increase
automatically.
What if I have no UK income or my earnings
are less than £3,600?
You will still receive basic rate tax relief on all contributions paid into your
BWSIPP, up to £3,600 gross (e.g. a personal contribution would be paid
net of basic rate income tax of £792 leaving you to pay £2,808
into your BWSIPP).
Will I get tax relief on contributions made to
a child or spouse’s SIPP?
Contributions paid on behalf of a child or spouse would be net of basic
tax, We will reclaim basic rate tax from HMRC and credit it to the child
or spouse’s SIPP current account. You cannot claim higher rate tax
relief on these contributions.
When will the tax relief be credited to my
bank account?
This depends upon when the contribution is paid but is usually
between 6 and 11 weeks after the contribution is received.
Can I pay contributions if I have
Enhanced Protection?
If you or your employer pays contributions you will lose your Enhanced
Protection. (Note – Enhanced Protection is available to individuals
with sizeable pension assets at 5 April 2006 who wish to protect
themselves from certain tax charges which may apply thereafter.)
Can I pay contributions in the form of
property or shares?
Yes, but you should seek specialist financial advice regarding this.
Contributions of this type are only tax-efficient if documented in a
certain way.
Can I stop my contributions at any time?
Yes, your contributions can stop or start at any time without any penalty.
However, you need to ensure you have sufficient funds available to meet
any regular investments or other commitments you have arranged
through your BWSIPP.
Can I contract out of the State Second
Pension through my BWSIPP?
No, this is not allowed.
TRANSFERS
Can I transfer existing pension benefits into
my BWSIPP?
Yes, provided these are from another UK registered pension scheme.
They can be transferred even if you have commenced income
drawdown in the transferring scheme provided the transferring
scheme is agreeable.
If you have commenced income drawdown the maximum income limit
will be the same as in the transferring scheme.
There is no tax relief on transfers from a registered pension scheme
and they do not count towards the Annual Allowance.
To transfer existing pension benefits, please complete the transfer
section of the BWSIPP application form and we will contact the
transferring scheme for further information
Can I transfer in Protected Rights?
No, this is not allowed.
Can I transfer investments held under another
SIPP to my BWSIPP?
Yes, usually but you should check with us first as not all investments
can be transferred directly.
Can I transfer my SIPP to another pension
arrangement?
Yes, you can transfer all or part of your SIPP to another UK registered
pension scheme. The transfer can either be in the form of a cash payment
or an “in specie” transfer of the SIPP assets to the new scheme.
If you wish to transfer your SIPP to an overseas scheme please
contact us for more information.
The transfer will always be made direct to the trustees or administrator
of the receiving scheme.
INVESTMENTS
What are my investment options?
The BWSIPP will allow you to invest in any asset although not all are
tax efficient.
If your BWSIPP enters into an investment transaction with yourself or
someone connected with you, the transaction must be carried out on
an arm’s length basis. This means your BWSIPP can buy or sell or
lease a property from/to you, your family or your business provided the
transaction takes place at market value.
We reserve the right to sell any investment if it jeopardises the
registered status of the BWSIPP.
Can my BWSIPP buy a property?
Yes, your SIPP can buy a commercial property at market value and it
may borrow up to 50% of the net value of your SIPP prior to the
purchase taking place, to help fund the purchase. The limit includes
any existing borrowing and the amount needed for any VAT, Stamp
Duty Land Tax or other expenses relating to the purchase. You also
need to make sure your SIPP will have sufficient income to repay the
borrowings.
Who can the Trustees borrow from on
my behalf?
Your BWSIPP can borrow from any commercial lender of your choice
subject to the Trustees’ approval.
If you require further information on property purchase please contact
us at the address given later.
Who pays the rent?
The tenant is responsible for paying the rent directly to your SIPP in
line with the terms of the lease. If the tenant is connected with you,
the rental value must be confirmed by an independent surveyor.
How are quoted shares held?
These are usually registered in the name of an authorised nominee
company offered by most stockbrokers
Can my BWSIPP buy residential property?
Residential property is usually not allowed due to the high tax charges
except in a small number of situations or via certain syndicates such as
Real Estate Investment Trusts (REITS)
Can I hold cash?
Yes, all SIPPs have a bank account established with HSBC Private
Bank (UK) Limited. All contributions, transfers and investment income
must initially be paid to this account for audit trail purposes. Gross
interest is currently paid at 0.25% below bank base rate and is credited
quarterly.
Should there be money kept in the BWSIPP
bank account?
You need to ensure that there are sufficient funds available to meet the
day to day liabilities of your SIPP, for example for administration fees,
mortgage payments and income payments.
How are the investments cashed in to pay
benefits, fees or other costs?
If there is insufficient money in the BWSIPP bank account and you do
not give us any other instructions, we will disinvest the most liquid
asset e.g. we will normally disinvest an insurance policy before selling
any property.
What do I do when I want the Trustees to
make an investment transaction on my
behalf?
You must contact us at the contact details given later to give us your
instructions.
What happens to any rental, dividend or
other income received into the BWSIPP bank
account for me?
Where this money is not needed to meet income or mortgage
repayments, you will need to give us instructions as to how you wish
it to be invested.
How do I know what my BWSIPP is worth?
Every year we will send you a statement confirming the value of your
BWSIPP on a specific day and detailing any contributions paid or
transfers received in the previous 12 month period.
BENEFITS
What is the maximum amount of benefit I
could have?
There is no limit on the overall value of your BWSIPP. However, if the
total value of all your registered pension schemes exceeds the Lifetime
Allowance (£1.6 million for tax year 2007/2008) then a tax charge may
apply on the excess amount above the Lifetime Allowance.
What is the Lifetime Allowance?
This is the amount in your pension fund which is allowed by HMRC
before any tax payments are levied. Your BWSIPP will be assessed
against the Lifetime Allowance when you take benefits and again
when you buy an annuity or reach age 75. Each time you take new
benefits a portion of the Lifetime Allowance is used up.
Once you have used up your Lifetime Allowance any subsequent benefits
taken will be subject to a Lifetime Allowance Charge. This is 25% of the
excess above the Lifetime Allowance if the funds are taken as regular
income, and the income is also subject to Income Tax. If the funds are
taken as a lump sum the effective Lifetime Allowance Charge is 55%. We
must deduct this charge before paying any benefits.
If you have pension funds accrued before 6 April 2006 and have
registered for protection this may reduce or eliminate any Lifetime
Allowance charge that may have been payable.
Are there any other tax charges?
Yes, if an unauthorised payment is made - e.g. if there is excessive
borrowing, if investment transactions are not carried out at market rate
or if rent is not paid when due by a connected tenant. We must report
all unauthorised payments to HMRC and the tax charge on you
personally would usually be 40 to 55% of the payment and your
BWSIPP would be subject to a further minimum tax charge 15% of the
payment.
When can I take benefits?
You can take retirement benefits from age 50 (age 55 from April 2010)
but no later than age 75. If you are in serious ill health, or in a
recognised qualifying occupation, you may be able to take benefits
earlier.
Can I have a lump sum?
You will usually be able to take up to 25% of your BWSIPP fund
(subject to you having sufficient available Lifetime Allowance) as a tax
free lump sum and this must be paid before your 75th birthday.
If you have registered with HMRC for enhanced or primary protection
or have a protected lump sum then different rules apply on the amount
of your tax free lump sum and you should seek specific confirmation.
The lump sum is normally tax free. There may be an additional tax
charge levied by HMRC if you use this lump sum to increase your
normal pension contributions.
Can I receive an income?
Yes, either by purchasing an annuity and/or by drawing an income
from your fund (income payments).
The level of income payments is set by HMRC. Different levels apply if
you are under or over age 75.
If you are under age 75, the maximum income is calculated as 120%
of the annuity your fund would provide, calculated using Government
Actuary’s Department (GAD) rates for men and women. These rates
take account of your age and gilt yields at the time of the calculations.
The maximum income is calculated when each part of your fund
comes into payment and again at 5 yearly intervals. There is no
minimum income payment.
It is important to note any pension transferred in drawdown in your
BWSIPP before age 75 will be held separately until such time as you
take further benefits from your BWSIPP.
If you are age 75 or older, the maximum income is 70% of the GAD
annuity rate for a 75 year old. There is no minimum level. However,
The Government has proposed to amend this in the Finance Act 2007
to increase this maximum to 90% and introduce a minimum level of
55% of the GAD annuity rate. The income levels will be reviewed
annually but will always be based on annuity rates for a 75 year old.
The Finance Act should receive Royal Assent in July 2007 but any
changes which are introduced are likely to be retrospective to 6 April
2007.
Is my income subject to tax?
Income drawdown payments are treated as earned income and taxed
under the PAYE system.
You can choose monthly or annual income drawdown payments to
suit your individual circumstances.
When can I purchase an annuity?
You can purchase an insured annuity at any time from age 50 (age 55
from 6 April 2010) with all or part of the value of your BWSIPP, you
would choose the insurance company. Annuity purchase will trigger a
check against the prevailing Lifetime Allowance (see “What is the
Lifetime Allowance?”). You will be able to select an annuity taking
account of some or all of the following:
(a) to provide level or increasing income payments
(b) to provide an annuity for your life only or to include a provision for
your spouse or partner
(c) to include a guarantee on your death
An annuity will pay you an income for the rest of your life. It provides
certain security over the income rather than the flexible, but not
guaranteed, future benefits provided by Unsecured and Alternatively
Secured Pension (see below).
If you purchase an annuity with the full value of your BWSIPP, your
BWSIPP will terminate.
What is Unsecured Pension?
This is the income you may draw from your BWSIPP prior to you
reaching age 75 as an alternative to purchasing an annuity. If you are
receiving unsecured pension income you still have full flexibility over
your chosen investments.
Do I have to purchase an annuity when I
reach age 75?
No but you must start drawing your pension from age 75, if you
haven’t already. Also, your benefits are checked against the Lifetime
Allowance at age 75 and any excess may be subject to tax (see “What
is the Lifetime Allowance?”). Also your maximum pension is then
recalculated on the Alternatively Secured Pension basis. You can still
choose to purchase a lifetime annuity at any time.
What is Alternatively Secured Pension?
This is the income you may draw from your BWSIPP from age 75 (see
“Can I Receive an Income”).
DEATH BENEFITS
What happens if I die before taking benefits?
If you die before taking benefits, the whole of the value of your SIPP
up to the Lifetime Allowance will be realised and the full cash value can
be paid to your beneficiaries. This payment would normally be free of
Inheritance Tax (IHT). Alternatively, a pension can be paid to your
financial dependants. When deciding the recipients of your death
benefits the Trustees will take into account any wishes you have
expressed to them. Any value above the Lifetime Allowance will
normally be subject to a deduction for tax.
What happens if I die before age 75 and I am
drawing an income?
If you die before age 75 the value of the fund will be available to your
beneficiaries. Your entire remaining fund value may be paid out as a
lump sum, less tax at 35%, or may be used to pay a taxable income
to your spouse and/or dependants. Again the Trustees will take into
account any wishes you have expressed. There may be an IHT
charge on your estate following the death of your dependant. Any
death benefit must be paid out within two years of the date of your
death. The value of your fund over the Lifetime Allowance (or your
personal Lifetime Allowance if greater) can be paid out as a lump sum
but is subject to a 55% tax charge unless you have previously
protected your fund.
What happens if I die after age 75?
If you were receiving Alternatively Secured Pension, no lump sum
death benefits can be paid (except to charity). Your BWSIPP funds
can first be used to provide a pension for a surviving spouse or
dependant either through income payments or purchase of an annuity.
If there are no such dependants, or on your dependant’s death, funds
could be reallocated to other members of the BWSIPP although any
amounts reallocated in this way will be subject to tax charges within
the SIPP as well as IHT.
Alternatively, funds can be paid to a charity nominated by you prior to
your death and will be exempt from taxes. We expect the Finance Act
2007 to allow BW SIPP LLP to nominate a charity, if you haven’t.
We will deduct any IHT due before paying out any benefits and pass
this to HMRC.
Is my BWSIPP written under trust?
Yes, you act as co-trustee with our trustee company BWSIPP Trustees
Limited.
Can additional trustees be appointed on
my death?
You can notify our trustee company that you wish a replacement
trustee to be appointed on your death. We cannot appoint additional
trustees without this notification.
FURTHER INFORMATION
Pensions and property are both complex subjects - together there are many pitfalls. We hope this page and booklet has made things clearer for you. However, a page and booklet like this can only provide general information. It cannot provide complete or specific advice to meet your particular circumstances. Please contact the pensions expert in your nearest Barnett Waddingham office if you would like further details. We will be delighted to help.
- In Amersham – John Landon
- In Cheltenham - Julia Bassett
- In Glasgow - Dot Clark
- In Leeds - Richard Millson
- In Liverpool – Lisa Butler
- In London - Clive Grimley
For more information and related articles, please click here.
