Liberty Pensions

SIPP stands for Self Invested Personal Pension. It is a personal pension as opposed to an occupational scheme which is set up by your employer.

It is a defined contribution pension scheme (also known as a “Money Purchase Scheme”). The level of pension that is paid out to the individual is dependent on the total of money that has accrued from contributions paid, be it by the individual or the individual’s employer, plus any return gained from the investments made with the contributions received.

There is another way a pension is calculated under a defined benefit scheme, also known as a “Final Salary Scheme” and can only be offered by an employer. The level of pension is calculated as a percentage of your earnings with that employer e.g. the pension amount is known, the fund value required to provide this pension is the varying factor. Where this scheme received contracted out monies from Her Majesty’s Revenue and Customs (“HMRC”) there will be a Guaranteed Minimum Pension (GMP). Quite simply, you are guaranteed to receive a minimum pension amount on retirement to replace your State Earnings Related Pension (“SERPS”). (Protected rights will be explained later)

All pension schemes need to be registered with HMRC to enjoy the tax privileges currently available under this Government. Registered pension schemes benefit from tax relief on contributions. In addition, the investment returns made on the assets held by the SIPP are not subject to income tax and on the sale of the asset, there is no Capital Gains Tax (CGT) liability.

Contributions are paid by you as an individual from your earned income or by your employer. All personal contributions are paid into the pension scheme net of income tax as the money received will have already had income tax deducted. As pension contributions are tax exempt, Liberty SIPP will reclaim basic rate tax from HMRC on your behalf and apply this money direct to your SIPP. Any employer contributions received by the pension scheme are considered to be paid gross of tax as this is offset against the company’s tax liability at the end of the tax year.

The contributions received by the pension scheme are then invested. Depending on the where you have authorised your IFA to make investment decisions on your behalf, these funds are invested on your behalf or you can decide where you want the funds invested.

With a SIPP you decide on the investment strategy and unlike other personal pensions offered by insurance companies where you select one of their funds to invest your money into, there is a wider range of investments from which you can chose.

Initially, all cash will be held in a bank account with The Royal Bank of Scotland (“RBS”). Once you have decided on where you want to invest your funds outside of this bank account, please let us know. It is likely that whoever you are investing with will have application forms which we will help you in completing. There is no requirement to invest your money and if you want to hold all funds in cash you are free to do so. Your account with RBS will earn interest at .25% above the current Bank of England base rate. Interest is paid gross and monthly into the bank account.

The SIPP is set up under discretionary trust. This means that in the event of your death, the fund within your SIPP does not fall into your estate and hence is free of Inheritance Tax (IHT). You will be appointed co-trustee with Liberty Trustees Limited to act as trustee to the assets held within your SIPP. Therefore, you will be registered co-owner to all the SIPP assets and hence your signature will be required for any amendments/payments from these assets. This includes the SIPP bank account. As a result, if payments are to be made from your bank account, such as paying out your pension, we will send you a payment instruction for signing. This will also need to be countersigned by Liberty Trustees Limited before any payment can be made.

If you inform us that you wish to transfer pension funds from other schemes of which you are a member of we will contact these companies for you. As the funds that would have provided you a pension from the original schemes will have been transferred to the SIPP, rather than receiving a pension from the original scheme, the SIPP will pay out your pension instead. In short, assuming you transfer all the pension schemes to which you have been a member, you will only receive a pension from the SIPP as opposed to from a number of different sources.

There will be various forms that the transferring pension schemes will require you to sign for these transfers to take place. Liberty SIPP will request these on your behalf and forward them to you to sign – we will fill in all the other parts giving details on where the money is to be transferred.

Please note that Liberty SIPP do not reclaim tax relief on transfers into the SIPP from other pension arrangements as any tax relief entitlement from contributions paid would have already been reclaimed by the transferring scheme.

Protected Rights are the name given to funds that have accrued from contracting out of the Second State Pension (S2P) which was very popular in the 1980s. HMRC pay into the pension scheme a proportion of your National Insurance contribution which would have counted towards your S2P, known as rebate contributions.

Where you have been a member of a Defined Benefit Scheme, where you were contracted out, there will be a Guaranteed Minimum Pension (GMP) attached to it. When these are received into the SIPP, they will be treated as Protected Rights benefits.

The SIPP is able to hold both Protected Rights and Non-Protected Rights, but we are required to hold these funds separately from one another as Protected Rights are more restricted on permitted investments. For clear audit purposes a separate bank account with RBS will be opened to hold any Protected Rights we receive.

It is important to note that on transferring GMP into the SIPP, you lose your entitlement to be provided with a guaranteed pension amount.

For example and illustration purposes only:

Under a scheme GMP is £4,000 pa, the fund required to purchase an annuity to provide this to you costs £68,000 (annuities are explained later) and the total fund value allocated to you is £150,000. On transferring to the SIPP £68,000 will be treated as Protected Rights and £82,000 as Non-Protected Rights.

The objective with any pension scheme is to provide you with an income throughout your years in retirement. On retirement, you have two options; purchase an annuity from a life office or “drawdown” a pension from your pension scheme.

An annuity is purchased from a financial institute, normally a life office, and in exchange for a lump payment, they guarantee to pay a regular amount to you for a fixed term. With retirement annuities, the term is for the remainder of your life and is known as a secured pension. The amount of pension paid is dependent on the amount you pay to the life office; the larger the initial payment, the bigger the pension. From there on, it is a gamble; if you live longer than the life office anticipate, the total amount for pension payments you received from the life office will have exceeded the purchase price of the annuity. Hence, you win as the life office has agreed to pay your pension until you die. Conversely, if you die before the life office expect, the total amount of pension you would have received will not have exceeded the purchase price of the annuity and the life office wins as it keeps the residual fund.

There are different types of annuity you can purchase which offer varying levels of protection in the event of your death, but the more protection you opt for, the less pension you get for your money.

If you choose to draw a pension from your SIPP, we will calculate the benefits that can be paid to you in accordance with HMRC pension legislation. The amount that can be paid is calculated using the value of your SIPP and figures provided by the Government Actuary Department (GAD). We will send out an illustration showing what pension can be paid.

Liberty SIPP will pay your pension net of basic rate tax. This is standard practice until HMRC advise us of your tax code. Until we are advised of this tax code, you may have paid too little or too much tax which you will be responsible for reclaiming/paying to HMRC at the end of the tax year.

Instead of using the entire fund to provide a pension, you can opt to take up to 25% of the SIPP fund as a pension commencement lump sum. This is a one off payment which is free of tax and must be taken at the start of receiving pension payments. Should you opt to take a pension commencement lump sum, the maximum amount of pension will reduce as the funds available to provide the pension have reduced.

The option to take a pension commencement lump sum is available whether you decide to purchase an annuity or you “drawdown” a pension from the scheme.

The pension amount that can be taken from the SIPP will be reviewed by Liberty SIPP at least every 5 years. If the investment return on the pension fund is lower than expected, then the pension will reduce. Conversely, if the investment return on the remaining pension fund is higher than expected, then the pension can increase. If you do not purchase an annuity, there is no guarantee of the level of pension you will receive in your retirement as the level of pension that can be paid from the pension scheme will depend on the value of the pension scheme. This is known as an “unsecured pension”.

Unlike an annuity, where your fund is lost to the insurance company if you die prior to receiving pension benefits equal to the fund used to purchase the annuity, any remaining fund can be paid as a pension to your surviving spouse or as a lump sum, subject to a tax levy. This protection does not affect the level of pension you can initially receive unlike with an annuity.

Please be advised Liberty SIPP Limited cannot provide you financial advice as we are not regulated to do so. If you need advice as to which option is best for your financial situation, you must speak to a financial adviser.