As the ‘pension’ tax wrapper has become less synonymous with providing an income in retirement and increasingly one part of the broader planning process alongside other tax wrappers, so the self-invested personal pension (SIPP) has become increasingly valuable in helping investors fulfil their financial goals in the most tax efficient way.
Financial advisers increasingly use cash flow modelling tools with their clients to establish and maintain a financial plan. The use of tax wrappers within this to achieve the most tax efficient ‘path’ illustrates how wide-ranging and flexible a SIPP can be in covering particular requirements.
Typically from age 55 any amount of accumulated pension savings can be withdrawn to provide one-off or regular payments as required. Up to 25% of accumulated pension savings can be paid tax-free.
It is now also possible that an individual’s pension fund can be passed down the generations without becoming subject to inheritance tax (IHT). For many this means that their SIPP will be the last wrapper to be accessed for income or other payments. ISAs, for example, provide tax-free income and typically are not IHT exempt so a SIPP investment would provide a better option when funds are required if passing pension savings on following death is a key requirement. Modern investment administration platforms such as that offered by Transact are ideal for managing investment and tax wrapper selection to optimise an investor’s financial plan. The Transact SIPP wrappers offer access to a very broad range of investments including shares, collective investment schemes, investment trusts, structured products and exchange traded funds (ETFs). These plans also include full flexibility in terms of taking benefits whether for the individual themselves or for their intended beneficiaries following their death.
The pension rules are continually changing with a main trend being the restriction of what can be paid into an individual’s plans. £40,000 (including basic rate tax relief on contributions made by the individual) is the current annual input limit that applies across all schemes of which an individual is a member although this starts to reduce for higher earners down to a maximum of £10,000. It is possible that the unused input allowance from the previous three years can be utilised once the current year’s allowance has been used. A £10,000 input limit also applies where an individual has taken income under the ‘flexi-access’ rules introduced in April 2015.
An individual’s lifetime allowance (LTA) for pension savings will also impact on the amount of input. If this limit (currently £1m for those taking benefits from 6 April 2016 who do not have a protected higher limit) is exceeded then tax of 55% or 25% is applied to the excess if taken as a lump sum or as a pension respectively.
These changes indicate a ‘direction of travel’ under which further restrictions (including the possible loss of tax relief on contributions) are likely so it is important that individuals make use of their current input allowance where they can to ensure that the benefits of a SIPP can be maximised.