Is a SIPP right for us?
Q: I often receive literature about self-invested personal pensions (SIPPs). I look at the information but don't really understand whether there would be any benefit to me (or my wife) in investing through a SIPP.
We're both 69 and have been retired for a number of years. My income is around £23,000 a year, and my wife has no income at all. My income is derived from a war pension of around £12,000 a year and a civil service pension of around £9,000 a year. I also have a couple of smaller pensions, amounting to £2,000 a year.
My wife doesn't pay tax, and I only pay a very small amount of about £200 a year as my war pension is tax-free.
Together we have about £150,000 in personal equity plans [predecessors of ISAs] and ISAs, which are invested in unit and investment trusts.
Given that our tax bill is very low, does investing in a SIPP make sense for either my wife or myself?
Justin Modray is a former IFA and the founder of candidmoney.com.
A: SIPPs are like any other type of personal pension, such as a stakeholder, except that they allow a very wide range of investments to be held within them.
Whereas a stakeholder pension might offer up to 40 funds, a typical SIPP will offer over 1,000 from many fund providers, and you can hold shares, investment trusts and exchange traded funds too.
However, this choice comes at a higher price than stakeholder pensions, although increased competition is pushing down prices with the emergence of low-cost SIPPs.
Given that you're retired, does paying money into a pension make sense? It would be inaccessible until you chose to convert it into a taxable income for life by, for example, buying an annuity, which is very inflexible.
There would be a small potential tax benefit for your wife, in that non-taxpayers can contribute up to £3,600 into a pension and still enjoy basic-rate tax relief of £720; however, I'm really not sure that in your position the benefit would outweigh the inflexibility of a pension.
Also bear in mind that pension annuity providers tend to pay poor rates on amounts below £10,000, so you could lose out unless you were able to build up a sizeable fund.
Instead, you should use your personal ISA allowances to help ensure your wife remains a non-taxpayer and to keep your income below the £24,000 threshold. Above this amount, your increased age-related personal income tax allowance will start to decrease; the beauty of ISA income is that it doesn't count towards the £24,000 limit.
Otherwise, everything looks in order - well done on building up a sufficient nest egg to enjoy a comfortable retirement.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.