As well as receiving up to 40% income tax relief on contributions, individuals are also entitled to take a tax free lump sum of up to 25% of their accumulated fund at their chosen retirement age. This can be age 50 and upwards (55 as from 2010). All of the time money is invested within the fund it remains tax free being subject to neither income tax, capital gains tax, nor inheritance tax. Allowing for the fact that you do not have to cash a policy to purchase a pension via an annuity, but simply draw from the fund whilst leaving it invested (subject to certain limits), this is particularly attractive. Effectively your money can remain in a tax free environment for many years during which you have full investment control.
Are you approaching retirement?
Whilst the possibility of being able to draw an income from your pension fund is attractive, we believe that it is very important to have maximum investment flexibility. A Sipp is therefore essential. If you are approaching retirement and would like to use a Sipp to draw your pension please contact us. We’d be pleased to show you how you might be able to use the “Open Market Option” on your existing pension to make this possible.
Improved access to information
In the past details about your pension may only have come by way of an annual statement. Many Sipp providers have up to date valuations which can be viewed securely over the internet 24 hours a day.
How to turn a £160,000 net investment into £481,735 in only seven years.! It sounds a little like a get rich quick scheme doesn't it? However, that is how the property market has worked to some degree over the last few years.
Property is therefore a very attractive option for Sipp investors. The following illustration indicates why (see note):
An individual has a pension fund valued at £100,000 and wishes to top up their fund by a contribution of the same amount. This will be mainly funded by the sale of shares using their annual capital gains tax allowance. The net cost to the investor is £60,000.
The investor is permitted to borrow, via their fund, a further £100,000 making possible a property purchase of £300,000. The property is let at a rate of £1,500 per month and this rent is used to pay off the outstanding loan. This is achieved some seven years later during which time the value of the property has increased to £481,700, assuming a reasonable growth rate of 7% per annum in the property market.
Note: A contribution of this size will only be possible post 6th April 2006 .
THE NEXT STEP:
For advice and guidance on SIPPS and the options available, please visit the next section