This is a child’s guide, which may help you with some of the background when you come to discuss it with your accountant/solicitor/financial advisor. The pension rules are complicated, and you should seek advice on how they relate to your own circumstances. You must be under 75 and a UK resident to be eligible to open a Sipp.
Sipps are ‘self invested personal pensions’ and they enable you to take greater control of your pension and to build a pension fund with much greater investment choice. The Sipp itself is in effect a tax efficient pot in which can be held a wide range of investments including individual stocks and shares, collective investments (investment and unit trusts), commercial property and cash. They have the same tax advantages as other personal pensions, with basic tax relief and higher rate relief, and 25% of the fund can be taken tax free.
You will need a Sipp provider and you may be charged a set-up fee and an annual charge. These charges vary considerably with different providers, so you should check the market. The rule of thumb is to decide what you want to invest it (eg investment trusts or property or whatever) and then look around for the best value Sipp in tht category.
The ‘lifetime allowance’ for the value of your Sipp and any other pension benefits you may have is £1.6m for 2007/8, rising to £1.8 million by 2010/11, and if the value of your Sipp rises above that then there are certain tax consequences. If your Sipp and other pension benefits were worth in excess of £1.6 m in April 2006 then there are certain protections available (‘enhanced protection’ and ‘primary protection’).
The rules for the amount you can put into a Sipp were freed up considerably in April 2006. You can now put in annually as much as you wish but tax relief is limited to the amount of your UK earnings in that year.
It may be possible for you to transfer existing investments into a Sipp and get the tax relief on the pension contribution, but you may be liable for capital gains tax on their value.
If you are aged 50 or over it may be possible for you to withdraw tax free 25% of the value without starting to draw an income from the Sipp. From age 75 you have to either buy an annuity or start drawing an income in the form of 'Pension Drawdown' (formerly known as an Alternatively Secured Pension (ASP).
From April 2011 there are big changes for Pension Drawdown. There is no resriction on the amount of withdrawal if you are getting guaranteed income from private and state pensions of at least £20,000 per year. You can delay taking any pension income and the tax charges on funds payable on death after age 75 are less penal. See further details
For a further description of Sipps, see http://www.traderhideout.com/resources/sipp.html
For greater detail and names of some of the providers see: