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Understanding ‘Self Invested personal Pensions’ (SIPPs) by Nigel Lord

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Understanding ‘Self Invested personal Pensions’ (SIPPs) by Nigel Lord

Tax Article
Background

SIPPs, introduced 1989 by Nigel Lawson, are an approved form of personal pension which allows an investor to build up a fund of assets by making their own investment decisions.

They are of particular benefit to the self-employed and investors on property.

The attractions of SIPPs will increase substantially following the introduction of new pension rules at 6 April 2006.

Income Tax Treatment of SIPPs

Investments in SIPPs are made net of basic rate income tax and higher rate relief is available under self-assessment.

Relief is presently dependent on sufficient Net Relevant  Earnings (NREs) being available to the individual, but this requirement will be relaxed from 2006.

Income arising to SIPPs is exempt from income tax.

25% of the fund may be taken tax free from the age of 50 (55 from 2010).

Thereafter, any pension paid will be subject to income tax at the individual’s marginal rates.

However, the pension fund will continue to earn income tax free.

National Insurance Contributions (NICs)

No NICs are payable on contributions made to SIPPs or on the pensions income.

Corporation Tax (CT)

Company contributions made into SIPPs qualify for CT relief.

From 2006 £200,000 contributions may be paid for each individual per annum.  This should prove a very valuable method of extracting profits from companies and eliminating marginal rates of CT (up to 32.75%).

Capital Gains Tax (CGT)

Gains made on investments held by SIPPs are exempt from CGT, even after a pension commences.

Inheritance Tax (IHT)

SIPPs are highly efficient for IHT planning as funds can be transferred to the next generation substantially free of tax (entirely free from 2006) providing they have been correctly structured.

Investments

It is possible to invest in the usual type of investments that conventional pensions use, as well as commercial property (e.g. one’s own business premises).

From 2006 this will be extended in scope to include most types of investment (including own company shares and residential or holiday property but not the investor’s primary residence).

It is presently possible for a SIPP to borrow 75% of its value to buy a commercial property.

From 2006 the maximum loan to value will be reduced to 50%.

There is an 18 month window of opportunity to acquire highly geared commercial property.

Advantages

SIPPs give flexibility to control one’s own investments and to acquire assets used in owned businesses.

This works tax efficiently as relief is available on commercial rents.

From 2006 this freedom will be extended.

The ability to continue self manage the fund in a tax free environment after the draw down of tax free sum.

Disadvantages

- High set-up costs.

- High annual administration costs (these are expected to become more competitive as the Market opens from 2006).

- Complex anti-avoidance legislation (simplification in 2006).

Summary

SIPPs are a highly tax efficient investment vehicle particularly when used for acquisition of property.

They need to be structured correctly and advice needs to be taken from both taxation experts and an FSA.

We are pleased to provide high level in house expertise in both these disciplines.

If you want to speak to Nigel to see how SIPPs can benefit you then please he is contactable as follows:

Nigel Lord

mail@lordassociates.co.uk

www.lordassociates.co.uk