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Wednesday 9 July 2008

Do it yourself: the joy of SIPPs

Ian Cowie on the joys of Self-Invested Personal Pensions

By the way, one unintended consequence of the reduction in basic-rate income tax from 22 per cent to 20 per cent due to come into effect on 6 April is that most people will have to pay more to maintain the rate at which they save for retirement. Basic rate and non-taxpayers will have to invest £800 to add £1,000 to any form of pension but top-rate taxpayers are unaffected.

Needless to say, HM Revenue & Customs is pretty careful about keeping a cap on the £17 billion ‘cost’ of pension reliefs in tax income it foregoes. That was why it balked at subsidising the acquisition of holiday homes and more recent plans to use SIPPs as a form of inheritance tax avoidance.

Even so, the maximum limits on how much each of us is allowed to put in are much simpler than they used to be. Instead of rising percentages of income you could invest at various ages, you can now put in 100 per cent of earnings up to £225,000 — whichever is less — subject to a lifetime maximum of £1.6 million.

But the fun part is taking the money out. You no longer need to pretend to retire or change jobs before you withdraw capital or income from these savings after you reach 50 years of age (due to rise to 55 in 2010).

For the first time, you can take up to a quarter of the fund as tax-free cash from all types of pension; including additional voluntary contributions (AVCs), free-standing AVCs, and opt-outs from the old State Earnings Related Pension Scheme once known as Serps — now called State Second Pension (S2P).

That last change is a windfall nobody expected and which affects an estimated £100 billion of savings. Formerly, everything in AVCs and S2P opt-outs had to be used to buy an annuity. Now you can use the cash for whatever you like — to pay off the mortgage or buy a boat.

True, an unholy alliance of HMRC and life companies are clinging to the idea that savers who reach 75 years of age should use remaining pension funds to buy an annuity — and there are tax penalties for non-conformists, although not quite compulsion. Recent pension reforms in general and SIPPs in particular still represent an enormous extension of consumer choice.

The price of pension tax reliefs used to be an almost total loss of control over your savings. You were also obliged to take a leap of faith in the life companies. Now do-it-yourself pensions mean neither of those worries need apply; that’s the joy of SIPPs.

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