SIPPs and other types of pensions have always offered substantial tax benefits, but now they’re even better
People Aren’t Sacrificing Their SIPPs To Buy Lamborghinis As The Tax Benefits Make Well Worth Keeping
Tax Benefits Make SIPPs A Valuable Tax Planning Tool
It’s been widely reported that cashing in your pension in one go is likely to incur you in a lot of Income Tax. But what’s becoming obvious is that it’s not just the horrendous amount of tax you could suffer in getting your hands on your fund, the loss of other tax benefits could make this very costly indeed.
SIPPs Have Always Enjoyed Significant Tax Benefits
It’s well accepted that on a like-for-like basis, lending or investing your money via a SIPP is likely to produce a better return than lending or investing it via almost every other vehicle, as our lending calculator illustrates. With tax relief on your contributions up to 45 per cent, tax free growth on your money (except dividends from stockmarket investments), and the ability to withdraw up to 25 per cent of your fund as tax free cash, what’s not to like about these tax benefits (June 2015)?
What is now becoming apparent is your SIPP could also provide the perfect vehicle to pass on your wealth and the tax benefits to your loved ones.
Up until 5 April 2015, although your SIPP didn’t form part of your estate for Inheritance Tax purposes, it was subject to a ‘death tax’ of 55 per cent. But now, if you’re over 75, your fund remains in tact and your beneficiaries pay Income Tax as they withdraw the money. So if you leave your SIPP to non-tax payers like your children or grandchildren, they could enjoy the same tax benefits as you, possibly getting their hands on your money tax free.
In a last ditch attempt by George Osborne to extract a wee bit of extra tax, this doesn’t take effect until April 2016. Until then, the ‘death tax’ rate is marginally reduced to 45 per cent. It follows that if you’re over 75, an efficient piece of tax planning is not to die for a little while yet.
However, if you die before age 75, whilst this isn’t good news for those you leave behind, what is good news is that your whole pension fund is passed on tax free.
Preserve Your Tax Benefits By Spending Money In Your Estate
Other than your SIPP (and other pensions) and assets you may have invested outside of your estate perhaps in Trust, pretty much everything you own makes up your estate for Inheritance Tax purposes. Once the value of your estate exceeds the Nil Rate Band of £325,000 (in the tax year 2015/16), Inheritance Tax is levied at 40 per cent. Spending assets in your estate instead of releasing money from your SIPP therefore gives you a double tax whammy:
You could reduce your Inheritance Tax burden by £400 for every £1,000 of estate assets you spend, compared with using your SIPP money that’s effectively tax free.
You suffer Income Tax and possibly Capital Gains Tax by holding your loans and investments within your estate, compared to holding them in the tax privileged area of your SIPP.
Tax Benefits Result In Increased SIPP Savings
As a result of the tax benefits, far from people ‘cashing out’, it’s no surprise many SIPP operators have reported significant increases in contributions from people who have been saving in their SIPP for years, as well as new contributions from people who haven’t been saving at all.
Martin Tilley, pensions expert at SIPP operator Dentons said: “People are now looking at depleting their personal funds instead of accessing their pension. Now they can leave their pension to whoever they like, that really appeals. They like the idea of paying money to their grandchildren and them not having to pay tax on it. A beneficiary who is not paying income tax, for example a grandchild who is not working, could withdraw £10,000 a year from the inherited pension pot and still not pay any tax because the withdrawal would be under the personal allowance limit of £10,600.”
Paul Evans, technical pensions expert at SIPP operator Suffolk Life is of the opinion that retirement is now a passé phrase that is no longer relevant due to the number of people working past their retirement age. 1.1 million over-65s are now in work. He said: “People are still working and it has taken the pressure off pensions for income and there is now more options for pensions. For a lot of people they want to pass money on and their pension may be the best way of doing that.”
Technical specialist Tony Wickenden is also of the view that tax benefits make pensions the first vehicle worth considering for your money.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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