The world of private pensions is a notoriously complex one, and it is these complexities that make many, even the experienced investor, procrastinate when it comes to making decisions regarding their future retirement. A SIPP Pension is different from a traditional one in that it provides a tax efficient way of investing funds to yield both a tax free lump sum and a regular income once you are over 50 and there are a host of UK SIPP pension providers.
SIPP Pensions offer a lot more flexibility and control over your investments as you can include equities such as cash, shares, commercial property and bonds and gilts. You can also include in your pension plan collective investments in a specialist residential property fund, and also gives you the freedom to transfer assets held in an occupational or personal pension, or annuity plan, into your SIPP.
The big advantage of a SIPP Pension is that they offer the best tax reduction and planning opportunities. For example, there is Income Tax relief on the contributions you make yourself to your SIPP, and at the highest level. So if you pay the higher rate of tax, for every £100 you invest you will receive tax relief worth £40, and if you are a lower level tax payer your relief will be £22 for every £100 you invest.
Another big benefit is that you take up to 25% of the fund in your pension as a lump sum which is tax free, and income tax will be paid on the remainder of the pension income that you receive from your pension. The amount that has been invested in your SIPP fund will then grow and be free of income tax, with the exception of any dividends that come from UK shares.
There is no Capital Gains Tax payable on any gain that you make from your SIPP. Corporation tax companies can also reduce the amount of National Insurance and corporation tax by making contributions to an SIPP on their employee’s behalf, and are therefore not taxed on the amounts they have invested.
As far as IHT, or Inheritance Tax is concerned, the rules are very simple. If you were to pass away before you there would be no IHT to be paid on any lump sum that have been distributed from the SIPP within two years of the date the death occurred, and there is also the choice of passing on the benefits of an SIPP to a spouse without having to pay IHT.