What is a SIPP?
SIPP stands for Self Invested Personal Pension and offers more flexibility and sophisticated investment options than a standard personal or stakeholder pension.
The basic rules for SIPP are no different to any other personal pension, including contribution limits and accessibility, however there are some key advantages to a SIPP:
- Phased tax free cash to manage a potential Lifetime Allowance charge
- Income 'drawdown' to better manage your income tax position
- Wide range of investment funds and investor protection
- Commercial property investment options
A SIPP may be suitable for dentists with larger than average fund values (£250,000+), those who are accumulating towards this level, or those who wish to consolidate existing multiple pensions.
Managing your Lifetime Allowance (LTA) through SIPP
A limit on pension values has been in place sine 2006. In recent years this has been reduced and currently stands at £1,055,000).
Many dentists use up a significant proportion of their LTA with the NHS pension. For example an NHS pension of £46,000 pa will use up to 100% of the current LTA. If you are in this position care needs to be taken with any personal pensions. When you take tax free cash from your SIPP this triggers a test against the LTA. This can be deferred to age 75.
The rules can be complex and it is worth taking our specialist advice on the timing of any tax free cash and income withdrawals from your personal pensions.
Consolidating personal pensions to SIPP
Transferring personal pensions into one SIPP can help your pension investments to be better diversified and more effective.
Traditional personal pensions are often held in a limited range of 'in-house' investment funds run by the pension provider. We recommend the use of a SIPP to provide access to 1000's of investment funds under one roof. This has the advantage of reducing risk and facilitates our regular fund review process.
Another key advantage is that each fund provider within your SIPP is covered by the FSCS (Financial Services Compensation scheme). To maximise diversification and reduce financial risk we would typically recommend a range of up to 20 funds within your SIPP.
SIPP Commercial property investment
Holding commercial property in a SIPP can be an attractive proposition, although comes with some disadvantages relating to costs and flexibility.
Your SIPP can buy commercial property and a dental practice freehold is an eligible investment. You will need to have sufficient funds or cash already in your SIPP to make the property purchase - you can't just transfer the property. However a SIPP can borrow up to 50% of it's value to make the purchase. For example a SIPP valued at £500,000 could purchase a £750,000 (commercial) property. Set up costs include valuations, legal work and administration fees and will be significantly higher than with alternative investment options.
Consideration should be made to the flexibility of holding commercial property in your pension. It may be difficult to take a phased withdrawal of tax free cash or income, especially where the majority of the SIPP assets are held in property. i.e. you can't sell part of the property to release cash. Rental income will need to accumulate inside the pension and will be subject to income tax on withdrawals. The growth of the property and accumulating rental income will be subject to a Lifetime Allowance test by age 75.
Specialist SIPP advice for dentists
Due to the complexity of the Lifetime Allowance issues, especially in relation to the NHS pension we recommend specialist advice is sought when investing in a SIPP. Our team of advisers is experienced in these issues and qualified to provide advice in your best interests.