What is a SIPP?
A Self-Invested Personal Pension (SIPP) can be a low cost, flexible and straightforward way to save for your retirement.
It allows you to take control of how your pension funds are managed by providing access to a wide range of different investments, including:
- Shares of individual companies
- Unit trusts
- Open-ended investment companies
- Investment trusts
- Exchange traded funds
- Commercial property
The pension ‘wrapper’ will hold these investments until retirement, at which point they can be turned into income.
A SIPP can be a good option for people who want to gather all of their pensions into one pot before they retire.
What is the difference between a regular and international SIPP?
An International SIPP is a version of the product designed specifically for those of us who are (or will be) non-UK resident.
In many ways, an international SIPP is very similar to a standard SIPP, but with one principal differences: investments can be held in different currencies.
If you intend to spend your retirement outside of the UK, you might be taking a risk by having a pension in sterling.
Exchange rate fluctuations could mean that you are suddenly faced with the prospect of living on a lower real-terms income in the local currency.
This is exactly what happened to those retired in Europe as a result of Brexit uncertainty, with sterling dropping more than 20 per cent against the Euro.
Who can have an international SIPP?
An international SIPP might be appropriate for a wide range of individuals, including non-UK residents and foreign nationals residing in the UK.
You can have an international SIPP if you are employed, self-employed or unemployed.
If you have already retired, it may also still be possible to take advantage of this type of pension arrangement.
Making transfers to a SIPP
In most cases, it is possible to transfer funds to a SIPP (regular or international) from another UK pension arrangement.
However, transferring to a SIPP is not always the best course of action and it is usually best to seek professional financial advice before doing so.
If you have a final salary pension which is valued at £30,000 or more, then it is a legal requirement to obtain professional advice before transferring.
It is not be possible to transfer to an international SIPP from an unfunded UK public sector pension scheme.
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How to withdraw funds from a SIPP
As with most pension arrangements, you can withdraw the funds in your SIPP from age 55 (from 2028, this will increase to 57).
You will have full flexibility as to how you access these monies – you can access the fund as lump sums, an income, or a combination of the two.
Under the flexible drawdown option, anything you don’t withdraw remains invested.
There is also the option of using your SIPP to purchase an annuity, which provides a fixed income for life, but there is now no obligation to do this.
A guide to SIPP taxation
Tax relief on contributions
If you aren’t resident in the UK for tax purposes at the time you make a contribution to the SIPP, then you won’t receive tax relief on that particular contribution.
However, if you are still paying UK tax, in spite of being resident overseas, then you can expect to receive tax relief on your contribution in the same way as you would with any UK-registered personal pension plan.
In these circumstances, the contribution is made net of basic rate tax, so the Government adds 20p for every 80p you contribute.
Higher rate taxpayers can then claim additional tax relief via their tax return.
The funds within in your SIPP will grow free from income and capital gains tax.
Tax implications of accessing your SIPP
When you access the funds in your SIPP, you can withdraw 25% of the fund as a pension commencement lump sum (PCLS).
This is free of tax in the UK.
However, if you are resident outside the UK, it may not be tax free.
Whether it is or nor, will depend on the tax treaty between the UK and your country of residence. You should always seek professional advice in such cases.
Withdrawals over and above the PCLS will be taxed as income in your country of residence.
If you are resident in the UK, you will be taxed at your highest rate of income tax. I.e., if you pay 40% tax on some of your income, all of your pension income will be taxed at 40%.
SIPP tax implications on death
If you die prior to age 75, then your beneficiaries can access the fund as a lump sum or as an income stream free of UK income tax. If you die after age 75, the beneficiaries will pay income tax at their highest income tax rate, but there will usually be no inheritance tax liability in these circumstances.
SIPPs and the life time allowance
Funds held within a SIPP are subject to the UK’s lifetime allowance (LTA), which is frozen at £1,073,100 until 2026.
The LTA applies to the total value of all your private and occupational pension arrangements.
Any lump sum withdrawals in excess of the allowance are taxed at 55% and any income withdrawals in excess of the allowance are taxed at 25%.
There were and are schemes that allow you to protect your LTA at a higher level than £1,073,100.
You can check if you already have protection but you will need an account for HM Revenue and Customers (HMRC) online services.
If you don’t have an account you can create one.
In addition, if you have been resident overseas for some time then you may be eligible for a non-residence enhancement factor which will increase your LTA.
As mentioned above, if you are considering transferring funds from another pension arrangement into a SIPP, then it could be a good idea to seek professional financial advice.
It can be beneficial in any case to consult a financial adviser before you set up a SIPP.
There is a huge range of investment options and not everyone will be comfortable choosing exactly where they wish to invest.
A skilled financial adviser can explain the pros and cons of the various options and can identify investment areas that are in line with your risk profile, as some of the available investment options are higher risk.
Regular reviews with your adviser can also be important – at these reviews the adviser can monitor the performance of your investment and recommend any changes.
Many people switch to lower risk investment strategies as they near retirement, knowing that they have much less time to make good on any losses they might suffer.
The fees on different international SIPPs can also vary greatly. An adviser can help you identify which are the best options in this respect.
Should I use an international SIPP or a QROPS
A Qualifying Recognised Overseas Pension Scheme (QROPS) is another retirement savings option available to you if you reside overseas.
A QROPS may be more suitable for those able to accumulate a large pension pot, as the UK lifetime allowance doesn’t apply on withdrawals.
Both SIPPs and QROPS offer you an extensive choice as to where to invest.
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Please contact me today for an informal discussion about how I can help you, whether it be SIPP advice or general financial planning.
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