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A quick guide to UK Self Invested Personal Pensions

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This is a brief summary of the main rules of Self Invested Personal Pension and for that reason won't cover every nuance or aim to affect every individual. The data contained doesn't constitute advice and then any questions arising should be discussed having a well qualified Financial Adviser. The thresholds and allowances derive from information and rules presently in effect (Sept 2012).

Self Invested Personal Pensions (SIPP's) are, as mentioned, a kind of Personal Pension available to UK residents. Generally, a SIPP can be used by people who are comfortable making their own investment decisions. Unlike a regular Personal Pension it enables you to invest in a number of different investments, including funds, shares, cash, alternatives and certain kinds of property.

Benefits can be accessed from age 55 and a tax-free lump sum payment of 25% from the pensions value can be obtained with the remainder providing a taxable income. Benefits from a pension must be taken at 75.

What is a Sipp Pension

In most cases, annual contributions can match annual earned income. A £50,000 annual limit (2012/13) along with a £1.5 million lifetime allowance also apply. Occasionally, these limits can be impacted by additional factors. Carry forward (unused annual allowance from previous years) may be used to contribute more than the £50,000 annual allowance. Each new contribution made will apply to the annual allowance within the tax year it is made (6th Apr - 5th Apr).

Tax relief is available to every eligible person. 20% of contributions are paid by the Government as easy tax relief. Higher rate taxpayers can claim an additional 20%back directly via their local tax office and extra rate taxpayers can claim up to 30% (based on 2012-13 guidelines).

Non-earners or those earning under £3,600 a year can contribute as much as £3,600 gross per year (£2,880 net) each tax year and receive tax relief at 20%.

The possibility advantages to having a SIPP arrangement could be:

Control: The higher control and adaptability to change contributions and investment direction

Choice: Diversify into your choice of investment and at levels you require.

Admin: All your pension funds and investments could be held within one place.

Transferring existing pension plans right into a SIPP is available. Many people have preserved pensions which have value with numerous providers. This can be from previous Employer Schemes, Final Salary Schemes, Stakeholder Pensions and SERPS. Many people believe that the transfer process from personal pensions into a SIPP can be a nightmare however in effect it can be easy. That is not to say it is the right thing to do but if it is then the operation is efficient.

Should you decide to transfer pensions, make sure that you know how the transfer will be made. Most cases will transfer in to the SIPP as Cash. Whilst you are deciding in which the cash should be invested you'll be beyond an investment and therefore not receiving returns. If seeking investment, remember that you can choose to invest across different investments and not simply a single fund. This enables for diversification.

Posted Sep 30, 2012 at 5:11am