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Self Invested Personal Pensions (SIPPS)

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      17.11.2007 16:08
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      Very advantageous to buy a commercial property via a SIPP

      In addition you can invest in commercial properties. This reduces the cost of buying a property for a business substantially due to the tax benefits. You do have to pay rent to the SIPP however. Essentially you are a tenant renting the property from the SIPP and you must pay a fair market rent to the SIPP ( 4 - 8 % of the property value, though this value is accepted pracitice and not set by the revenue ). The rent itself is tax deductable and the rent going to the SIPP goes into your pension fund. In many ways a very attractive option if you're looking to buy commercial premises for your business

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        31.01.2007 17:29
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        The Ultimate, only got yourself to blame, Pension Scheme

        With the easing up of the Pension regulations in April 2006 I opened a SIPP account at the earliest opportunity.

        Basically a SIPP (Self Invested Personal Pension) is an opportunity for every man, woman and child to save money to draw as a pension.

        Pensions really are not as complex as everyone makes out and a SIPP is highly recommended; I cannot now imagine not having one. It allows you take control and monitor your investments in one place, to reduce dealing costs, help you to plan savings and take advantage of the huge tax break that is available.

        The only downside of contributing to a pension is that there is absolutely no way that you can access the investments before you retire, so money that goes in is only for your pension.

        The upside is the great tax break. The Inland Revenue will top up every contribution to your pension by at least 22% (40% if you are a higher tax rate earner). So for a non-earner to invest their full £3,600 they only have to actually hand over £2,808

        The new pension rules are surprisingly generous. If you are employed then you can invest up to 100% of your earnings (up to £215,000) into a personal pension. If you are a non-earner you can invest up to £3,600 – this can includes babies from day one!

        You can have a SIPP as well as contribute to your Company pension fund

        There is a limit before tax planning starts to get complicated but the fund value has to be around £1.5 million before you need to worry, should I be so lucky.

        You can start to draw your pension when you reach age 55 (or at 50 if you are this age by 6th Apr 2010). At pension age the rules allow you to withdraw up to 25% of your invested pension as a lump sum.

        You can continue to invest in a SIPP up to age 75. You can in fact continue to pay in and draw a pension at the same time. So-called immediate vesting is a clever party trick. You could invest £2,808, which will be made up to £3,600 by the kind taxman, and immediately withdraw 25% = £900 – and still leave £2,700 invested.

        You can transfer existing Stakeholder Pensions and Personal Pensions built up through FSAVC’s (Free standing additional voluntary contributions alongside an Employer’s scheme) into a SIPP.

        All capital growth within any pension fund, including a SIPP, is tax free, ie no capital gains tax, However they cannot reclaim the tax credits on share and fund dividends/distributions, and we all know who to blame for that. Interest on cash remains tax free.

        You can basically choose to invest from almost the entire range of available investments funds, stocks, shares, bonds, warrants, gilts available on the markets.

        Additionally you can buy and sell units as you wish within a SIPP and hold the balance as cash.

        The SIPP provider group lists Inland Revenue approved providers, though a lot of the content seems to be out of date.

        My SIPP provider is Hargreaves Lansdown and I manage everything on-line.

        As everyone keeps telling you, set up a pension early in your life, even with a small regular sum, and in the long term it will build into something worthwhile. You can take one out for anyone eg children, grandchildren, spouse etc – they will certainly thank you.

        I may make it sound simple here, but I stress I am not any kind of advisor, so don’t take anything here as a recommendation. If you have any doubts you must read up about pensions. The only authoritative source is the Inland Revenue website and these days it is surprisingly user friendly and easy to understand.

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          09.06.2001 05:48
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          In recent years the options available for those reaching retirement with insurance company based pensions has become much more flexible, but with this additional flexibility comes choice and therefore decision. There are currently three clear alternatives for retirement planning and each have their merits. 1. Conventional and Unitised Annuities --------------------------------------- A conventional annuity is simply a promise made by an insurance company to pay an agreed sum on a regular basis until death. Compulsory Purchase Annuities are purchased with capital arising from pension funds and are taxed as income under PAYE. The earliest age at which annuities can typically be drawn is 50 with a final starting age of 75. Not all insurance companies offer the same level of income paid in the same way to the same person, so it often pays to use the "Open Market Option" and transfer a pension fund or funds built up to another more competitive insurance company. This is typically done without any charges by the transferring insurance company as long as the transfer is made at "normal retirement date". IFAs can help you secure the highest appropriate level of income. There are many different types of annuity that can be purchased, but as it is a once and for all decision, it is absolutely vital that the right choice is made. With so many variations though, which is the most appropriate? Annuities can be arranged to continue to a spouse on death at various rates of the member's pension (in full, half or one third for example) and increase each year to counteract the effect of inflation over the longer term. However, once an annuity has been purchased, the terms cannot be changed. With conventional annuities, the policyholder is aware (to a certain extent) what income they will receive from one year to the next. The one obvious exception to this would be an inflation-proofed pension wh
          ere the future rate of RPI was unknown. Upside: Guaranteed income for the rest of your life Downside: Income based on annuity rates at the time of retirement over which you have no control Unitised Annuities ------------------ It is also possible to purchase a unitised annuity where the future level of income is dependent on the returns of the underlying insurance fund. Typically the policyholder, in conjunction with their professional adviser, consider what appropriate rate of underlying investment growth should be assumed at the outset. The higher this level, the higher the starting income. If the chosen level of growth is achieved each year, then the annuity income will remain the same. If the rate of growth is exceeded, then the annuity income will rise by the difference. The converse is also true that if lower than expected investment returns are seen, the a reduction in annual income is possible. Upside: Should investment returns exceed expectations, then a rising level of income can be enjoyed. Over the long term this may provide a higher income than that from a conventional annuity. Downside: Poor or low rates of return (such as may be seen in a bear market from even competent fund managers) may mean a reducing level of income. With longer term interest rates currently at very low historic levels, the income current pensioners are receiving may have fallen short of expectations some years ago. With this in mind the Government introduced the concepts of both Phased Retirement and Income Withdrawal or Income Drawdown. 2. Phased Retirement -------------------- Personal Pension Plans are often "clustered" that is arranged into a series of typically 1,000 identical segments. This means that at retirement some, not all, of these segments may be used to purchase an annuity thus giving an element of control over the actual level of starting income.
          The remaining segments may be cashed in during subsequent years until age 75 when all must have been used to buy an annuity. One important point to note with Phased Retirement is that a tax free cash sum (which can often be up to 25% of the value of the fund) is not all available initially with this type of policy. An element of cash is taken with each partial withdrawal until all segments have been utilised or the member has attained age 75. Why do this when the initial income level is lower than a conventional annuity? If you can afford not to draw all your income initially, perhaps because you will have consultancy income or you plan to work part time and require a top up of income, then this may be sufficient to begin with. In the meantime, one would hope that the remaining fund continues to rise and as annuity rates tend to increase with age (assuming no change in longer term interest rates), then you would expect more for your money in later years. In the event of poor performance from the underlying pension fund, you may decide that you wish to transfer the benefits to another provider (which may give rise to charges) otherwise the other option is to purchase an annuity which may not be attractive at that time. Upside: With an increase in annuity rates and a sufficiently high investment return you may expect to receive more from this income than could be provided by a conventional annuity. On death before all the fund has been used to buy an annuity, the balance may be paid to the deceased's estate free of inheritance tax if the policies are written in trust Downside: If interest rates fall or investment performance is insufficient you may end up with a lower income than that available from a conventional annuity. In addition, you must be prepared to accept a lower income in the early years and the lack of the tax free cash sum at outset 3. Income Withdrawal/Drawdown ---------------
          -------------- Income Withdrawal bears some similarities to Phased Retirement, but also has some very clear differences. Income Withdrawal allows for policyholders to take all the tax free cash sum initially and an income thereafter between prescribed limits. This income is actually drawn from the pension fund, as the name implies, rather than by the purchase of an annuity. As before, the earliest date one can normally start drawing income is age 50 and the final age is 75. The Government Actuaries Department sets the initial level of the income which is then revalued every three years. The income withdrawn must be between 35% and 100% of what a conventional annuity would provide at those times, but may be varied from year to year and even during the year - again within the levels mentioned above. The main advantage behind Income Withdrawal is the ability to vary the level of income you wish to receive before age 75. On death before retirement there are several options open to the survivor: Any dependent survivor may continue Income Withdrawal until the day the deceased would have attained age 75 (or themselves if sooner), The balance of the fund can be used to buy an annuity for the survivor on the terms of their choosing, Alternatively the survivor may decide to withdraw the balance of the fund as a cash sum subject to a tax charge of currently 35%. In the event of poor fund performance it may be possible to transfer the benefits of an Income Withdrawal policy into a Self Invested Personal Pension or SIPP. This allows the member or an independent fund manager greater freedom of investment while continuing the concept of income withdrawal. SIPPs are typically offered by larger IFAs and some accountants or solicitors as well as mainstream insurance companies. Upside: More of the fund remains invested than is possible with Phased Retirement offering the potential for additional growt
          h before age 75. Generous additional benefits on death before the entire fund has been utilised - subject to the 35% tax charge. Often SIPP option in the event of poor performance. All the tax free cash available at the outset. Downside: If growth rates are not sufficiently high and annuity rates fall then future income may be lower than planned. The income level requires full consideration each year and this type of pension contract typically has higher charges than Phased Retirement making it an unattractive option for pension funds of perhaps less than £250,000. In addition, it is not yet certain whether the value of the fund on the death of the member will not be counted in their estate for IHT purposes Conclusion ---------- As well as these three main opportunities, insurance companies often offer hybrid schemes based along these lines. Unitised annuities are becoming more common so too are Phased/Income Withdrawal combinations that allow for some cash to be drawn where the former would not normally allow. Considerations -------------- Where the pension is the only or main source of retirement income, then great care should be taken when selecting either Phased or Income Withdrawal as the income may be less than initially planned. In addition, with pension funds of perhaps less than £250,000 after the tax free cash sum has been paid, the higher charges may outweigh the simplicity of a conventional or unitised annuity. Finally, when accepting a lower starting annuity, one must be assured that the future income will be sufficiently high to make up the shortfall on that offered by a conventional annuity. This means accepting an increased risk of a stockmarket linked fund. For this reason, passive funds or lower risk funds such as With Profits are generally not seen to offer the sort of returns needed to improve the income sufficiently. The Cost of Annuity Delay ------------------
          ------- While much has been made of the benefits of delaying annuity purchase under Income Drawdown and Phased Retirement, those facing retirement should be aware of the concept of "Mortality Drag". What is this? In deciding the level of annuity rates, insurance company actuaries make assumptions about life expectancy. In general terms, life expectancy does not reduce by one year for every year that you age. A male retiring at 50 might be expected to live for perhaps 28 years. Someone retiring at 70 might still be expected to live for 15 years for example. Under normal conditions, the starting level of an annuity increases with age. However, the rate of increase slows towards age 75 because of the greater life expectancy at that time. Therefore, for those choosing not to purchase their retirement benefits early, a measure of additional investment return is required to compensate for this effect. The main constituent of an annuity fund is Government Gilts. At age 60, the required growth rate to match an annuity fund is about 1% plus the return on long dated gilts. At 65 that rises to almost 2%, at 70 it is almost 3% and at 75 it is over 4%. The dichotomy is that while ever increasing rates of growth are required, policyholders are often naturally predisposed to reducing investment risk at the same time.

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