What is a SIPP?

Who is this guide aimed at?

This guide is primarily aimed at the self employed and those in non pensionable employment.

So why invest in SIPP?

Pensions legislation grants extremely generous tax relief’s to individuals in providing for their retirement.

So what does pensions legislation do?

Pensions legislation confirms that you can normally claim tax relief on contributions you make to the bespoke SIPP up to a maximum of 40% of your earnings each year depending on your age.

The following table relates to the maximum level of income tax relief that will be received on contributions to a personal pension plan.

Age in Tax Year Maximum Contribution (Net Relevant Earnings)
Under 30 15%
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
60 + 40%

  • An earnings cap of €275,239 will apply to pension contributions for the purposes of tax relief for the tax year 2008. This earnings cap may change on an annual basis.
  • It is important to note that tax relief is not automatically guaranteed, you must apply to and satisfy the Revenue Commissioners requirements.

Why a self invested personal pension?

In essence, a SIPP is a personal pension plan established with an insurance company, in this case with New Ireland Assurance.

However, the significant difference between a traditional personal pension plan and the SIPP is.

Control
The biggest difference between a traditional personal pension plan offered by ab insurance company and the SIPP is CONTROL. Investment control is in your hands from day one.

Unlike a pension offered by an insurance company you do not ‘tick a box’ to chose the investments to be held in your SIPS, you are not handing the investment decisions regarding your pension fund to a faceless investment manager.

You, typically in partnership with your pension /investment advisor, chose the assets that you want to hold in your SIPP.

So what is a self invested personal plan?

A SAPS is a company sponsored pension scheme that does not require the involvement of an insurance company.

A SIPP is a personal pension plan pension, underwritten by New Ireland Assurance that does not use the investment management arm of New Ireland Assurance.

SIPPs are typically established by the self employed and those in non pensionable employment.

By contributing to a SIPP rather than a traditional insurance company personal pension plan you retain complete control of how the funds in your SIPP are invested.

The range of investment opportunities available to a SIPP investor is significantly greater than those offered by a traditional insurance company personal pension plans.

How long does it take for my SIPP to be set up?

Your SIPP can be set up in a number of days, you will fill in the SIPP application form, with your financial advisor, and forward the completed application form to

Bespoke Trustees at

20 Laurence Street
Drogheda
Co Louth

We will look after processing the application with New Ireland and forward the appropriate policy documentation to your Financial Advisor for onward transmission to you.

How much can be contributed to my SIPP?

As mentioned previously the maximum amount that can be contributed to your SIPP for tax relief purposes is based on your age and level of Net Relevant Earnings.

The following table relates to the maximum level of income tax relief that will be received on contributions to a personal pension plan

Age in Tax Year Maximum Contribution (Net Relevant Earnings)
Under 30 15%
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
60 + 40%

  • An earnings cap of €275,239 will apply to pension contributions for the purposes of tax relief for the tax year 2008. This earnings cap may change on an annual basis.
  • It is important to note that tax relief is not automatically guaranteed, you must apply to and satisfy the Revenue Commissioners requirements.

Tell me about the tax breaks in more detail

  • Contributions
    Contributions made by you to your SIPP can reduce your income tax liability for a tax year.
    Note:
    You should always seek independent advice when making personal contributions to your SIPP.
  • Tax Free Growth
    The investments in your SAPS will grow free of Irish Income and Capital Gains Tax.
  • Tax Free Lump Sum
    Upon retirement you currently have the option to take a lump sum of 25% of the value of the fund.
    There can be times where not all of this lump sum may be tax free, you will read more about this later.
    You will read more later on what can be done with the balance of the SAPS.

Do I have to contribute the maximum amount to my SIPP?

No, you do not have to contribute the maximum amount allowable to the SIPP but there is a minimum amount that must be initially contributed to your SIPP.

What is the maximum pension fund I can have?

In 2005 the Budget, brought in to law by the Finance Act of that year, introduced (amongst one or two other things you will read about later) the concept of a ‘maximum tax relieved pension fund’.

Originally this maximum tax relieved was set at €5M per person, this limit is indexed every year on this 1st of January.

If the value of your aggregate pension benefits is worth more than the maximum limit at the date of drawing your benefits, the excess amount will be liable to income tax.

As you can imagine this maximum tax relied pension fund can have an impact on the maximum tax free lump sum you are entitled to. As it stands the legislation says that the maximum tax free lump sum is capped at 25% of the applicable annual indexed amount at the date of drawing pension benefits. You may be in a position to take a lump sum in excess of this amount but any excess will be liable to income tax.

What age can I access benefits from my SIPP?

You can access benefits from your SAPS at any time from age 60 onwards.

So what investments are allowed in my SIPP?

You have an extremely wide choice of investment options available to them.

Your SIPP can invest in anything from a bank deposit account (initially all your SIPP contributions are invested in an interest yielding deposit account with Anglo Irish Bank) to individual shares and Government bonds, property syndicates, unit trusts, tracker bonds and individual investment products offered in the market place.

It is probably easier to highlight what type of investment that are not allowed or are not ‘tax efficient’ in a SAPS.

Prohibited Investments
There are very few SIPP investments that are actually prohibited by the Revenue Commissioners.

Typically the following SIPP investments are prohibited by the Revenue Commissioners;

  • Land or property development with a view to re-sale – the legislation specifically refers to ‘investments’ of a pension scheme. Development with a view to a re-sale is prohibited. Development with a view to retaining and letting the asset within the SAPS is however acceptable.
  • Pride in possession articles – you can’t own a race horse or a vintage car in your SAPS, fine wines or works of art are also prohibited.
  • Non – arms length investments – all investments by your SAPS must be made on an arms length basis. Therefore the vendor (the seller of the asset to your SAPS) and the purchaser (your SAPS, the sponsoring company and you) must not be connected. If property, it cannot be let to you, the sponsoring company or any one connected to you, and in the event of a sale of the property it must not be sold to you, anyone connected to you or the sponsoring company.

How can I take my benefits when I get to retirement?

Option 1
As discussed earlier, you can take a lump sum of up to 25% of the value of your SIPP and buy an annuity with the remainder of the fund.

An annuity is an annual income and is typically quoted in percentage form, e.g. an annuity rate of 5% means you will get an annual income of €5 per annum for every €100 of pension fund you give an insurance company.

Annuities can be level in payment, i.e. they remain at the same level every year, or the can be indexed linked in payment, e.g. increasing in line with inflation. A spouse’s pension can be provided for, that is a pension payable to a spouse in the event you pre-decease him or her. Children’s pensions may also be provided for.

Option 2
You can chose to take a lump sum of up to 25% of the value of the SIPP (note the maximum tax relieved pension fund mentioned earlier) and investment the remainder in an Approved Retirement Fund.

So what is an ARF?

An ARF is a post retirement investment fund. Similar to the SAPS investments within the ARF grow tax free.

Any income drawn from the ARF will be treated as income for the ARF investor and is liable to income tax as for example salary would be.

There is one condition to investing in an ARF, you must have a separate guaranteed source of income of at least €12,700 per annum (e.g. a guaranteed pension or the State pension benefit – single person only).

If you don’t have this €12,700 guaranteed annual income you must place € 63,500 in an ‘Approved Minimum Retirement Fund’ (AMRF) until age 75 or place the €63,500 with an insurance company to receive an annuity (an annual income).

AN AMRF operates in precisely the same fashion as an ARF, except that you cannot access the capital (the €63,500 originally invested) prior to age 75.

Do I have to take an income from an ARF?

Yes, the legislation was changed recently to force you to take at least some income from the ARF every year.

For the tax year 2008 (1 January 2008 to 31 December 2008) you will be considered to have taken 2% of the value of your ARF as income even if you haven’t taken any income from it.

For the tax year 2009 and subsequent years you will be considered to have taken 2% of the value of your ARF as income even if you haven’t taken any income from it.

Any income you do actually take from your ARF will reduce this ‘deemed’ amount taken from your ARF.

What happens to my ARF if I die?

Both your ARF and your AMRF are personal assets, therefore they can be passed-on in the same way as any other personal assets on your death.

What is the tax treatment of an ARF on death?

What if any tax will arise will be based on a number of factors, particularly the relationship between you and the person receiving the proceeds of your ARF/AMRF.

  • To a spouse
    There are not automatic tax implications if an ARF / AMRF is transferred to a surviving spouse on death. The spouse is considered to ‘step into the shoes’ of the deceased ARF owner. However any income drawn down from the ARF by the surviving spouse will be liable to income tax in the normal way.
  • To a child aged 21 or over
    There is no inheritance tax payable in this case. The value of the ARF inherited is treated as income in the hands of the recipient in the year of disposal, and PAYE at the standard rate (currently 20%) applies.
  • To a child under 21
    In this case, the ARF is considered to be part of a normal inheritance. If the combined value of the total inheritance passing (including the value of the ARF / AMRF) is below the normal CAT threshold for the child there should be no inheritance tax payable. If the value of the inheritance is greater than the applicable threshold there will be a potential inheritance tax liability on the amount in excess of the threshold. Inheritance tax is currently 20%.

In this case, the ARF is considered to be part of a normal inheritance. If the combined value of the total inheritance passing (including the value of the ARF / AMRF) is below the normal CAT threshold for the child there should be no inheritance tax payable. If the value of the inheritance is greater than the applicable threshold there will be a potential inheritance tax liability on the amount in excess of the threshold. Inheritance tax is currently 20%.

What if I have an annuity instead of an ARF when I die?

Well that will depend on what type of annuity you bought, how long was the guaranteed payment on the annuity, did you include a spouses pension when you bought your pension from the insurance company.

What happens if I die before I get to retirement age?

In the unfortunate event of your death before you reach retirement the value of your SIPP will be payable to your estate.

What are the set up costs of my SAPS and how much does it cost to run on an on-going basis?

Please feel free to contact your financial advisor or Bespoke Trustees on 041 980 6666 or by email at info@bespoketrustees.ie to discuss the costs associated with establishing and maintaing a SIPP.

Can I have a SIPP if I already have a personal pension with an insurance company?

Yes you can. The Revenue Commissioners will nor restrict the number of pensions schemes you have, they will however as mention previously in this document tax any ‘excess’ pension fund that exists when funds become available.

You can also normally transfer benefits from an insurance company pension scheme to your SAPS, however you should always seek professional financial advice to ensure you are aware of the potential impacts of such a transfer.

Is it possible to have too much in my SAPS?

No, however as mentioned previously where there if the value of your total pension arrangements exceeds the appropriate threshold applicable when funds become available to you (typically age 60), the excess will be taxed.

Contributions to my SIPP; Where do they go and what do I do with them from there?

Initially your SIPP contributions are invested in an interest bearing bank account. From there you can pick the investments (generally done in conjunction with advice from your financial advisor) best suited to you.

How do I effect an investment?

How you effect an investment really depends on the investment type but broadly speaking the following will be the procedure:

You provide Bespoke Trustees with details of the investment, e.g. investment memorandum of a structured product or the name of the stockbroker if setting up a share portfolio.

We will review the investment to ensure it is ‘Revenue compliant’, i.e. it does not breach any of the Revenue’s prohibitions on pension scheme investments.

Assuming the investment is Revenue acceptable, we will complete the required documentation and forward to you for your signature.

We will then arrange for the transfer of funds from the SAPS bank account, with your signature and approval, to the relevant product provider.

When the investment matures funds will be transferred back to your SAPS bank account for re-investment.

In the case of a share portfolio you decide which broker you would like to use, an account will be opened with the broker in the name of the SIPP. Funds are then transferred to the broker to allow you to start investing. You are free to buy and sell whatever shares you want to, and as with all investments in your SIPP.

At any time please feel free to contact your financial advisor or Bespoke Trustees on 041 980 6666 or at info@bespoketrustees.ie to discuss a proposed investment.

A SIPP is an extremely flexible, cost effective and tax efficient means of providing an income or lump sum in your retirement.

© Bespoke Trustees Ltd, 2008

This brochure is based on our understanding of current legislation and Revenue practice as at August 2008

While every care has been taken in its preparation, this brochure is of a general nature, is based on our understanding of current legislation and Revenue practice, and should not be relied on in relation to a specific issue without taking appropriate financial, insurance or other advice. The content of this document is for information purposes only and does not constitute an offer or recommendation to buy or sell any investment or to subscribe to any investment management or advisory service. If any conflict arises between this brochure and the trust deed and rules establishing your SAPS, the provisions of the trust deed and rules of your SAPS will apply.

Terms and conditions apply, investing in a geared investment or fund that contains an element of gearing may result in greater volatility than that associated with non geared investments. In the event that an investment does not perform as intended an investor may not receive back all of the original capital and in extreme circumstances may lose the entire amount invested.

Disclaimer: The information provided on this website is supplied as a general guide only. Bespoke Trustees Limited does not accept any responsibility for any loss suffered, errors or omissions. In all cases independent advice should be obtained before establishing a self administered pension scheme.

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