The rules changed in April 2006, and now nearly everyone in the UK is eligible for a Sipp, or to transfer a pension into one. The
rules have been relaxed so people can pay into occupational and personal pensions at
the same time.
To benefit from tax relief on contributions up to age 75, you need to be a UK resident, or be a Crown Servant serving overseas, or their husband, wife or civil partner. You
can also benefit, if you have been non-UK resident for up to 5 years, if you were
resident when you took out the Sipp. If you meet these requirements you can usually
pay in at least £2,808 per tax year, which with basic-rate tax-relief is boosted to £3,600 gross, whether you are a taxpayer or not. This means that children, retired people,
and non-working carers or parents can build up a fund.
SIPPs like all other types of registered pension schemes enjoy tax advantages of various kinds:
Contributions to SIPPs are made net of basic rate income tax and higher rate relief is available under self-assessment up to HMRC limits.
Tax relief is available on up to 100% of an individual’s UK relevant earnings; or £3,600 if greater. Any contribution in excess of the Annual Allowance (£215,000 for 2006/2007) will be subject to a tax charge of 40%. Note that this Annual Allowance restriction does not apply in the tax year that benefits are wholly crystallised.
The fund itself is a tax-privileged (apart from tax on dividends from UK equities which is irrecoverable).
Rental income from a property is received tax-free and is ‘on top’ of any pension contribution.
25% of the fund (subject to any transitional protection) 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
No NICs are payable on contributions made to SIPPs or on pension income.
Company contributions made into SIPPs reduce the company’s profits assessable to Corporation Tax relief. There is no limit to the levels of employer contributions that may be paid for each individual per annum (although any contributions over the Annual Allowance (starting at £215,000 in 2006/2007) will be subject to a benefit in kind charge of 40% on the employee. It is important to note that although in theory, contributions are unlimited, employers claiming tax relief on contributions could face problems if the amount contributed is considered ‘excessive’ by HMRC. Local tax inspectors will have the final say on whether a business can deduct pension contributions in calculating taxable profits based on guidance issued by HMRC.
Gains made on investments held by SIPPs are exempt from Capital Gains Tax. However, with the Lifetime Allowance of (initially) £1.5m from April 2006, care should be taken that capital gains and income accrual do not take the fund over this limit as the plan holder may face a tax charge of up to 55% of the excess if the limit is breached.
Lump sum death benefits paid normally escape IHT if paid by discretion exercised by trustees (does not apply to UI or ASP options).
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