Introduction to SIPPS – SIPPs or ISAs: Which is the best option? With auto-enrolment fast-approaching, many individuals have begun to look at their retirement savings options in a different light. For those who do not have the time or expertise to control their own pension arrangement directly then auto-enrolment will be viewed as a positive development. However, for those savers who wish to retain control over the finances set-aside for their retirement, now is the time to focus on the options they have available to them and the associated risks and benefits that those options bring. This article investigates two of the main ways in which savers can obtain the desired level of control over their retirement planning by comparing and contrasting Self-Invested Personal Pensions (SIPPs) and Individual Savings Account (ISAs). What are they? SIPPs and ISAs are examples of ‘wrappers’, financial products designed by the government where individuals can protect their money from taxation. ISAs: Individual Savings Accounts (ISAs) are available to all adult residents of the UK and enable them to hold their savings either as cash - in the manner of a traditional savings account - or as stock market-based investments. The returns which are achieved via either method are tax-efficient and profits are Capital Gains Tax exempt. An ISA has an overall investment limit of £11,280 per year, of which no more than £5,640 can be in cash. Limits are indexed annually in line with the consumer price index. SIPPs: A Self-Invested Personal Pension (SIPP) is a specific form of personal pension where the individual investor is able to choose where and how their pension fund is invested, rather than entrusting their money to one insurance company or fund manager.They therefore enable savers to make their own investment decisions from the full range of investments approved by HM Revenue & Customs (HMRC). The fact that an investor can choose from a number of different investments means that SIPPs offer greater levels of control over where money is invested that traditional pension schemes.Please remember that the eligibility to invest in an ISA or SIPP will depend on individual circumstances, and all tax rules may change in the future. How are they similar? 1. The high level of control that SIPPs and ISAs can offer to a saver enables individuals to decide upon where and how their money is invested in line with their own personal circumstances and objectives. This means that funds can simply be transferred into more profitable or less risky investment using the facilities and expertise of the plan provider as and when desired. 2. SIPPs and (Stocks & Shares) ISAs invest the money deposited in equity-based products, such as shares, bonds, gilts and unit trusts or OEICs amongst a select few others, where the returns are tax advantaged. The value of the fund then increases or falls based upon the market performance of the stocks or shares invested in. Therefore, in the event of a sharp downturn or crash, investments held within a SIPP or ISA can lose some of the money originally deposited. 3. SIPPs and ISAs are subjected to costs and charges relating to their management and administration by the plan provider. How do they differ? 1. Far larger amounts of money can be paid into a SIPP than an ISA. Up to £50,000 a year can be paid into a SIPP (or 100 per cent of the saver’s annual income if this figure is smaller). If the saver is not a taxpayer, then they are able to deposit a maximum of £2,880 a year and retain eligibility for the 20% tax top-up. However, as mentioned above, the annual ISA allowance for 2012 is only £11,280 – with a maximum of £5,640 to a cash ISA with the remaining amount able to be placed into a stocks and shares ISA. 2. SIPPs offer the facility of a tax top-up at a rate of 20% when money is deposited. This increases to 40 per cent for a higher-rate taxpayer. So if an investor deposits £800 into a SIPP, the government will top that up to £1,000 - essentially giving back the 20 per cent tax that would have been payable on ta deposit of £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form. ISAs do not have this facility despite retaining other tax benefits. Tax is not payable upon money withdrawn from an ISA, whereas income that comes from a SIPP is taxed in the same way as any other income, except for a tax-free lump sum of up to 25% of the total value of the SIPP that can be claimed when the saver reaches the age of 55. 3. The funds within a SIPP cannot be accessed until the saver reaches the age of 55. However, the funds within an ISA can be accessed whenever so desired by the saver – subject to any restrictions specific to a particular provider – and no tax is payable upon withdrawal. This offers greater flexibility in terms of access to money and may therefore be more beneficial for a particular set of personal circumstances and/or financial objectives in the years preceding retirement. 4. The proceeds of a SIPP fall outside of the investor’s estate and so are not liable for inheritance tax. However the proceeds of an ISA do not and as such may be taxable on the event of the investor’s death. Conclusion • SIPPs and ISAs offer a tax efficient way of growing funds for their retirement • SIPPs and ISAs both enable investors to retain control over where and how their money is invested • SIPPs arguably offer greater tax advantages for greater amounts of money but ISAs provide superior flexibility in terms of access to invested money Savers have the option of opening an ISA and a SIPP.
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