SIPP Frequently Asked Questions

Pension Schemes registered with HMRC are granted generous tax incentives to encourage individuals to save for retirement.

A SIPP (Self-invested Personal Pension) is a registered pension scheme that is more flexible than a traditional personal pension and has very wide investment powers.  

• No UK tax on income or capital gains is payable by your pension fund, although your pension fund may not recover the tax credit on dividends
• You can take a tax-free lump sum of up to 25% of the value of your fund when you start to take your pension income (subject to the lifetime allowance)
• A substantial lump sum is payable to your beneficiaries in the event of your death before taking your pension benefits which will usually be tax-free
• Pension income is taxed in the same way as earnings, but is not subject to National Insurance and cannot support further contributions
• All personal contributions attract tax relief at your highest marginal rates of income tax and are paid net of basic rate tax. So, if basic rate tax is 20%, you will pay £80 in order to invest £100
• We will reclaim the basic tax relief and add it to your Private Pension. If you are a higher rate tax payer, you may be able to claim some or all of the additional relief through your tax office
• Your employer may also contribute to your Private Pension but their contributions will be paid gross. Employers may be able to claim the contribution as a tax relievable deduction if HM Revenue & Customs considers the contribution was made wholly and exclusively for the purposes of trade
• You will not be taxed on employer contributions within the annual allowance
• Hornbuckle Mitchell can arrange for a contribution or transfer value to be paid by a transfer of assets. A contribution paid in this way may create a liability to capital gains tax, but will qualify for tax relief as if it were a cash contribution

• The Plan may provide benefits for you in later life for dependants and beneficiaries in the event of your death
• When you decide to take your benefits, you will be able to take a pension or a reduced pension and a tax-free lump sum
• You may take your pension as an unsecured pension
• If you take an unsecured pension, you will be invited to choose the amount and frequency of withdrawals from the pension fund. The maximum annual withdrawal is
  determined by regulations. You may choose to take no withdrawal in a year
• You may choose to phase in the start of your benefits
• An alternative way of providing a pension is for assets to be sold and the proceeds applied to the purchase of an annuity with an insurance company
• If your total benefits from all schemes exceed the lifetime allowance, you will be subject to a lifetime allowance charge on the excess 

• You can invest as much as you like, but excessive contributions are not usually tax-efficient
• If your personal contributions exceed your annual limit, you will not qualify for tax relief on the excess
• The annual limit is the greater of 100% of earnings and £3,600 (after tax relief)
• If total contributions (personal and employer) from all sources exceed the annual allowance then you will be taxed at a rate of 40% on the excess

HMRC has set the following amounts for the annual allowance: 

The level of the annual allowance will be reviewed at 6 April 2011 and every five years thereafter.

• Contributions will be invested according to your wishes

• We will only rarely veto the purchase of an asset if the purchase could create a legal or tax liability

• In the absence of an instruction from you as to how money should be invested, it will be held in the Bank of Scotland SIPP bank account

• In the absence of an instruction from you, we will use our discretion when deciding which investments to encash in order to pay benefits, charges and taxes

If you have to give up your normal job because of sickness or accident, the Private Pension can provide benefits in the form of a pension or tax-free lump sum and reduced pension

If you are so ill that your expectation of life is less than one year, the whole fund can be converted to cash (by selling assets) and paid to you as a tax-free lump sum

• It is an option available to anyone over 50 (55 from 2010) and under 75. It provides a means of taking benefits from pension funds without committing to the purchase of an
  annuity immediately

• It allows you to take up to 25% of your fund immediately as a tax-free lump sum. This option must be taken at outset; otherwise it will be lost

• Your Private Pension comprises of one arrangement, made up of 1000 segments, some or all can be put into Unsecured Pension. The level of income can be varied within
  Government Actuary Department (GAD) limits

• In broad terms the maximum level of income is currently approximately equal to 120% of what could be provided by a conventional single life, level annuity. The minimum is 0%.
  Income levels are revised by GAD every five years and an appropriate adjustment to the level of income you receive may subsequently be necessary, where the level of income
  initially selected is above the maximum revised GAD limits

• It is an option open to anyone from age 75 who wishes to either avoid or defer buying an annuity

• In broad terms the maximum income is 90% and the minimum income is 55% of a comparable level single life annuity at age 75. The maximum income is reviewed
  annually

• On death a pension can continue to be paid to your spouse, civil partner or dependents
  • On the death of the your spouse, civil partner and or dependants the remaining fund can be passed to a charity of the SIPP member’s choice, with no tax liability

• Alternatively, the fund can be passed to the family or estate. The tax charges on death are significant with an unauthorised benefits charge of 55% plus inheritance tax of 40% which leads to a combined rate of tax of 82%. HMRC have made the taxation of Alternatively Secured Pension very complex and individual advice should be sought before taking this option

• The benefits from a SIPP should only very rarely affect entitlement to state benefits.
• In particular, the state pension is not affected by income from other sources and the pension credit only has an impact on those with pension income which is well below what a SIPP investor could anticipate

The full value of your fund will be used to provide benefits for your beneficiaries, subject to HMRC rules.

You will be asked to ‘express a wish’ as to who those beneficiaries should be and the trustees of the scheme will usually abide by your wish.

Any lump sum, up to the value of your personal lifetime allowance can be paid to your spouse or civil partner and or dependants. This is usually free of inheritance tax and can only be paid within two years from the date we are notified of your death. If the lump sum exceeds the lifetime allowance when added to any benefits already taken by you, there will be a lifetime allowance tax charge at a rate of 55%.

Alternatively, the fund can be used to purchase an income for your dependants in which case the income will be taxed at the dependants’ marginal rates of income tax and there will be no lifetime allowance charge.

This will depend upon how benefits are being taken.

If you have purchased an annuity, it may provide a dependant’s pension. The policy document will provide full details of the benefits available.

If you die whilst you are in Unsecured Pension, your nominated
survivor (spouse or civil partner) has three different options
open to them;
• they can take a cash lump sum (with a tax charge of 35%),
• they can buy an annuity with the fund, or
• they can choose to continue taking unsecured pension

With Unsecured Pension, not only can you receive an income, but it also maintains the flexible financial protection from the residual fund. If there is no surviving spouse/dependant/civil partner the cash lump sum, less a 35% tax charge is paid out to
your beneficiaries.

Protected Rights is the element of your pension fund that has accumulated by contracting-out of the Second State Pension Scheme (S2P), previously known as the State Earnings Related Pensions Scheme (SERPS). You may have accrued Protected Rights funds in the form of:

• An Appropriate Personal Pension Plan which has received National Insurance rebates

• A company pension scheme which is either a contracted-out money purchase or a final salary pension scheme

From 1 October 2008 Protected Rights can be held within a SIPP however the funds have to be ring-fenced and in the event of the death of the member a 50% spouse or civil partner’s
pension must be secured. The requirement to provide a survivor’s pension is likely to be abolished from 2012.

The interest rate paid on the SIPP bank account is variable and
calculated as follows:

Bank of Scotland pays the Hornbuckle Mitchell Group commission calculated as follows:

Interest is calculated on the daily cleared balance and paid to your account on the last business day of each month. It will be paid after deduction of tax at the rate ruling on the date of application unless the necessary HMRC documentation has been completed by the customer and accepted by the Bank.

This information is based on that provided by Bank of Scotland. Bank of Scotland is not responsible for any inaccuracy or omission in the reproduction of this information.