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The Tax Benefits of Self-Invested Personal Pensions Explained

January 21, 2015

ira-QA[1]Self-invested personal pensions, also known as ‘SIPPs’, are an approved form of personal pensions that give investors the opportunity to accrue a fund of assets, providing them with complete autonomy over investment decisions.

In recent years, SIPPs, like those offered by James Hay Partnership, have experienced an exponential rise in popularity. Indeed, figures suggest that over one million plans will be in place by the end of 2015.

Still, many people are unfamiliar with their exact role and function. If you’re one of them, read on to find out more…

SIPPs and their Affect on Taxes

The main reason that SIPPs have experienced such a surge in popularity is due to the tax benefits attached to them. These are manifold and numerous…

Income Tax

Income arising from SIPPs is exempt from income tax when filing taxes – a major boon for investors. 25 per cent of the fund itself may also be taken from the age of 55 onwards. After this, any pension paid is subject only to the individual recipient’s marginal rates. Any income raised via the pension fund itself continues to be discharged from any obligation to pay income tax.

National Insurance Contributions

A further benefit of SIPPs is that contributions made to them, and income raised via the pension fund, are exempt from paying national insurance contributions.

Corporation Tax

SIPPs are also granted relief from making corporation tax payments, meaning that company contributions will not be eaten into. £200,000 may be paid into the fund each year per individual. This allows companies to extract profits, whilst reducing their tax burden by exempting them from corporation tax rates of up to 32.75 per cent.

Capital Gains Tax

A further exemption exists in the form of capital gains tax. This applies to gains made on investments even after the pension has commenced.

Inheritance Tax

One of the key areas in which SIPPs can be manipulated to deliver maximum tax benefits is in the arena of inheritance tax. Used properly, SIPPs are a legitimate means of transferring funds to the next generation without paying tax. Correctly structured with the help of a specialist, this is a unique and valuable benefit which makes them incredibly useful to those faced with the prospect of leaving their loved ones a significant inheritance tax bill.

Offering the opportunity to control one’s own investments and acquire assets, as well as the boon of tax advantages, SIPPs can prove to be a very valuable tool in the hands of those who know what they’re doing. Could they be of benefit to you?