What are the SIPP Rules?

The word pension is bandied around quite a bit these days; it’s then usually proceeded by other words like crisis or scandal. Whilst many of us have spent our lives believing that the state pension is the mot surefire way to provide for our financial future, we haven’t been fully educated about their limitations and the other alternatives that are available to us. In fact many of the UK’s population are happy to settle for what’s right in front of them, despite there being potentially more lucrative options hidden in plain sight. Whilst for some the state pension provide sufficient means for everyday, day to day life, it by no means provides for any kind of luxurious lifestyle. In 2019/20, the full level of the new state pension was declared to be £168.60 a week (£8,767.20 a year). A study conducted in May 2018 concluded that the minimum amount of money required to live a comfortable retirement would be quite literally double this amount. So, if you’re looking to build a substantial retirement nest-egg, it’s important to seek out alternative means of acquiring capital, before it’s too late.

Thankfully there are options out there. Options that provide much more flexibility and adaptability than the traditional pension. Pension plans like SIPPs provide their users with the potential to invest their pensions and earn high capital gains. But just what are the SIPP rules and how do they differ to the traditional pension? Join us as we discuss the many benefits that SIPPs can offer and how they can positively contribute towards your financial future.

What can I invest into my SIPP?

Self-invested personal pension plans give investors much more financial freedom than your typical state pension. SIPPs allow you to determine how and when your money is invested, and ultimately give you more flexibility than their traditional counterparts. Introduced in 1989 by the chancellor of the time Nigel Lawson, SIPP’s have been in a state of constant evolution, along with their rules and regulations.

Throughout these ongoing changes, however, the government never really concluded any definitive set of SIPP rules and had no criteria to determine an ‘acceptable’ or ‘unacceptable’ investment. Instead the government identified certain investments as being ‘unauthorised payments’ and penalised them with tax charges. This achieved very little but to muddy the waters for an already confused cross section of investors. Nevertheless, those investments that were deemed as ‘unauthorised’ (seemingly arbitrarily) by the government were also recognised as being unfit for use within a SIPP.

This being said, this list of ‘unauthorised’ investments is in fact, quite short. From top to bottom there are only a handful of blacklisted investments, most notably loans to members and people or companies that are connected to them. Due to this particularly short list of restrictions, investors are left an enormous list of possibilities when it comes to investing their pensions. An investor’s options fall just short of endless. When trying to determine what you can and can’t invest into your SIPP, however, you first need to decide what provider you are going to use. After all, each provider will have a different set of rules as to what you can and can’t invest, some specialising in particular assets. At one end of the spectrum, SIPP providers may be prepared to accept investments limited to unit trusts and other pooled investments. At the other end of the spectrum operators may accept investments that are quoted on a world stock market.

Whilst not prescribing to any objective set of SIPP rules, the usual assets that SIPPs allow investors to invest in are:

Unit trusts

  • Investment trusts
  • Government securities
  • Insurance company funds
  • Traded endowment policies
  • Some National Savings and Investment products
  • Deposit accounts with banks and building societies
  • Commercial property (such as offices, shops or factory premises)
  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange

How much can I invest into my SIPP

One SIPP rule that you were probably curious about from the outset is the amount that you can invest. Generally, the amount of money that you can invest into your pension is dependent on the amount of money you earn and the amount of tax that you pay. As a rule of thumb you can invest 100% of your earnings a year (if you wanted to) , with tax relief applying on contributions up to £40,000 a year. For those with a high income however (£150,000 or above), your annual allowance becomes more and more limited, dependent on how much you earn. In a more of an extreme example, someone who earns £210,000 would only be able be to invest up to £10,000 annually.
One of the primary advantages of pensions are the tax benefits that they provide. In this respect a SIPP is no different. Personal contributions you make up to your earnings are given basic rate tax relief at 20%.

Can my employer contribute to my pension?

It is a legal requirement that all employers offer a workplace pension scheme. Workplace pension schemes enable you, the government and your employer to contribute to your pension scheme.

By law, all UK employers need to offer a workplace pension scheme. Workplace schemes allow you, your employer and the government to pay into your pension. That being said your SIPP is not a workplace pension. Your employer can, however, contribute to your SIPP instead of contributing to your workplace pension scheme. The contributions offered by your employer and government are paid gross and will not be susceptible to any tax deductions. Whilst these contributions may count towards your annual allowance, they are not restricted by the amount of money that you earn.

Am I allowed to have more than one pension?

Yes, there is no set limit as to the number of pensions that you can have. You could in theory have a workplace pension whilst using a SIPP at the same time. This allows you to diversify your capital and utilise the particular benefits of each type of pension to your advantage. Many people acquire different types of pensions throughout their lives, acquiring a mix of personal and professional in the process. It is important, however to bear in mind the tax implications when it comes to balancing a various of different pensions and pots of money.  If you want to avoid any penalties, it’s important that you try to keep within the confines of your lifetime allowance. Your lifetime pension allowance (whilst adjusted each year in alignment with inflation) for 2019/20 is £1,055. If you didn’t already know, your lifetime allowance is a value that’s set and maintained by the government. It caps the total amount that you are able to accrue in pension benefits over your lifetime while still making the most of full tax benefits. Whilst you can technically exceed the allowance, you will be subject to tax penalisation on the excess when withdrawing a lump sum.

Now that you’re more clued up as to what the SIPP rules are why not read our ‘What is a SIPP‘ blog for a more in depth review of SIPPs and how they can prove to be a valuable addition to your retirement fund.