What is a SIPP - (Self Invested Personal Pension)?
A SIPP is, fundamentally, a personal pension. As with all pensions, its purpose is to provide the investor with a tax efficient means of building funds to secure a good retirement income. Most traditional pensions only allow you to select from a limited list of funds, normally run by the pension company's own fund managers. A SIPP is different. It allows you to choose from a wide range of funds and other investments - even individual stocks and shares (much as you may do with your ISA) and also property.
Saving in a pension such as a SIPP has significant tax benefits. The government will contribute 20% of every gross contribution you pay - meaning a £1,000 investment in your SIPP costs you just £800. If you’re a higher rate tax payer, the tax benefits could be even greater. In the above example you could claim back as much as a further £200 via your tax return if you have sufficient income or gains in the higher rate tax bracket.
When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25% of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income.
Landlords across the UK are beginning to wise up to the tax saving potential offered by buying commercial property within a SIPP.
- Buy-to-let property bought in a SIPP (as of 2006) is free from capital gains tax.
- Rental income is free from income tax.
Example of a SIPP...
Option 1 - Purchased through a SIPP
Example: A Hotel room at The Flaxby priced at £90,000. For an Outright pension fund purchase, the fund required is £180,000 (50% of fund).
Option 2 - Purchased with a Loan
- Immediate pension fund size of £108,000 (20% tax payer).
- Further tax relief of £18,000 for 40% tax payer.
- True cost of Hotel room based upon 40% tax relief is £90,000 - £36,000 = £54,000.
Plus...
- Property income free of tax.
- Growth free of tax.
- Day one entitlement for tax free cash of £27,000.
- NO Initial SIPP setup costs.
Tax information based upon current system and is liable to change without notice.