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Contract-based schemes

Self-invested personal pensions

Self-invested personal pensions offer a wide range of permitted investments.

How self-invested personal pensions work

Self-invested personal pensions (SIPPs) are a type of personal pension. They are an individual contract between you and the pension provider. However, SIPPs offer much wider investment powers than are generally available for personal pensions and group personal pensions.

The wider investment powers can allow you to invest in a wide range of assets, including:

  • quoted UK and overseas stocks and shares
  • unlisted shares
  • collective investments (such as OEICs and unit trusts)
  • investment trusts
  • property and land (but not most residential property) insurance bonds.

A SIPP can also borrow money to purchase some investments. For example, a SIPP can raise a mortgage to part-fund the purchase of a property. Such properties would normally then be rented out and the rental income, received by the SIPP, can be used towards servicing the mortgage repayments and the costs of running the property.

Not all SIPPs allow you to invest in the full range of allowable investments. SIPPs that hold specialist investments (such as property) may be liable to pay higher charges than schemes that hold ‘mainstream’ investments.

 

Contributions 

Although your employer may choose to contribute to your SIPP, there is no obligation that they do so. Where an employer does contribute, they may require that you, also contribute, for example by ‘matching’ your contributions.

SIPPs are flexible and are portable. If you change jobs, or stop working, you can continue contributing to the scheme, and, if you join a new employer, they may also decide to contribute to it. If you do change jobs, you should let the pension provider know to ensure that your contributions continue (especially if your old employer was paying contributions on your behalf).

Since 2006, there has been no restriction on the number of different pension schemes that you can belong to, although there are limits on the total amounts that can be contributed across all schemes each year if you are to receive tax relief on contributions.

 

Drawing pension benefits 

SIPPs are money purchase schemes. The value of your retirement benefits are determined by:

  • the amount of contributions that have been made;
  • the period that each contribution has been invested, investment growth over this period; and
  • the level of charges.

Under current legislation, you can commence drawing retirement benefits from the age of 55 and you don't have to stop work to draw benefits.

Up to 25% of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income.

The amount of income you receive depends on the options that you select. These include the income continuing to be paid to a dependant in the event of your death, the income increasing each year to offset the effects of inflation and the frequency at which the income is paid.

There are different ways that this income in retirement can be provided. These include taking out an annuity and income drawdown.

Pensions that are paid are liable to income tax, but are not liable to National Insurance contributions.

If you've previously contributed to a pension scheme, you may have retained benefits under the scheme. You may want to consider transferring the value of any old pensions to a new pension scheme. Please talk to us if you are interested in this.

Group self-invested personal pensions

Group self-invested personal pensions (GSIPPs) are a type of group personal pension. They are offered by employers to allow employees to build up a retirement income. Unlike group personal pensions, GSIPPs offer much wider investment powers than are generally available. More information about these investment powers can be found above.

 

Frequently asked...

Can I change the amount I pay into my GSIPP?

Before changing contributions, you should check with your pension provider, although normally this should not be a problem. If you're employed, and your employer is matching your contributions, a change to the level of your contributions could result in a change in the contributions your employer pays, so you should also let them know. If you’re increasing your contributions, your employer may also increase their contribution.

Can I pay a lump sum into my GSIPP?

Yes. Contact your pension provider as you may need to complete a form.

Contributions that you pay as the member receive basic-rate income tax relief at source, subject to certain conditions, so, for example, if you pay a lump sum of £2,000 into your GSIPP, this will receive tax relief of £500, so a total of £2,500 is invested in the GSIPP. If you're a higher-rate (40%) taxpayer you can also claim additional tax relief of up to £500 through your self-assessment tax return, and up to an additional £625 if you are an additional-rate (45%) taxpayer.

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.