How do I get a Sipp Pension?
Although Sipps are marketed as 'do-it-yourself' products, they are legally quite complex and require a proper pension fund to be set up with trustees.
A large number of specialist investment firms and insurers offer Sipp products that will allow taxpayers to take out a self-invested personal pension and, like all investments, it's worth shopping around to make sure you are getting the one that will suit your needs best.
Many firms will charge to set up a Sipp and many will also levy an annual administration fee.
There will also probably be separate fees to pay for each of the investments within a Sipp.
Some companies are offering low cost Sipps without a set-up charge or an annual fee, but while these might be attractive, it's also worth checking and comparing the fees for the other parts of the Sipp to see whether the initial savings might be cancelled out by higher fees later on.
Read More on Sipps Pensions
Will I still have to buy an annuity?
For most people the answer will still be yes, but the system is flexible and those who can afford to live on a reduced income will be able to avoid buying an annuity.
Under the new rules, from 2006 it is possible to draw down the funds from your Sipp at any time between the ages of 50 and 75.
This will change in 2010 to between the ages of 55 and 75.
The Sipp holder will be able to take out up to 25 per cent of the fund as a tax free lump sum.
Most people are likely to use the rest to purchase an annuity, but it will be possible to choose an alternative known as Alternative Secured Income, which will allow a Sipp holder to continue to draw down income from their fund.
The drawback of this method is that the maximum payments after 75 will be equivalent to about 70 per cent of the value of an annuity, meaning that it will only be suitable for those who are able to afford to live on a reduced income.
The advantage of taking an Alternative Secured Income is that when the Sipp holder dies their spouse will receive a pension.
When the spouse dies, any remaining assets in the fund will be reallocated to other family members, although there will be an, as yet unspecified, inheritance tax charge to pay.
Can it help me avoid inheritance tax?
The short answer is yes.
If a person dies before withdrawing assets from their fund, members of their family could be able to inherit without payment of inheritance tax.
Again, this is a potentially significant saving, although exactly how much remains a grey area because it is unclear how the Inland Revenue will treat such inheritances.
It might come down to a judgement by the Revenue of the 'intent' of the Sipp fund holder - if the Revenue judges that investment in a Sipp was designed to avoid inheritance tax, then it could decide to impose a levy itself.
The best idea for anyone considering using a Sipp to avoid inheritance tax is to take professional advice at the time that will take account of that person's individual circumstances.
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