Updated: May 30, 2019

SIPP Rules Explained

What rules apply for SIPPs? Read on to find out everything you need to know.

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: May 30, 2019

If you want to take control of the money you’re saving towards retirement, a self-invested personal pension (SIPPs) could be the scheme for you.

SIPPs are a type of personal pension which allow you to choose your own investments from a wider pool of assets, but what are the rules surrounding SIPPs, are you able to access your funds before retirement, and what exactly can you invest in through a SIPP?

We answer all those questions and more in our guide.

What rules do I need to know about?

In recent years, there have been changes to certain SIPP rules and also new SIPP rules that have been brought in. The regulations now, compared to when these products were first introduced in the UK in the late 80’s, should be more investor friendly but that is not always the case.

There are restrictions on certain investments, regulations on how much you can pay in, and rules on how old you need to be to start paying in, as there is when you have passed the age to be able to pay in anymore.

You will be glad to know that there are no SIPP rules in the UK that prevent you from having multiple SIPPs — you can actually have as many as you like.

Eligibility rules

  • A UK resident to open and contribute to a new SIPP (however you may be able to transfer an existing UK pension to a SIPP if you are not a UK resident).
  • You must be under the age of 75 to open and contribute to a SIPP.
  • You are unable to access the funds until the age of 55.

HMRC rules

The SIPP rules set out by HMRC are:

  • Annual tax free contribution allowance of £40,000 or 100% of your earnings whichever is lower.
  • Once a taxable drawdown has taken place the annual tax free allowance is reduced dramatically to £4000.
  • Lifetime allowance of 1.055 million from 19/20 tax year.

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What tax rules are in place?

Your SIPP investments can grow without having to pay income tax or capital gains tax. You will also get tax relief on your SIPP contributions meaning for a basic rate tax payer you get £100 invested for every £80 personal contribution.

There are many different SIPP taxation rules. For instance, if you were to purchase residential property in your SIPP you could be liable for a tax bill which would be a minimum of 55%.
To discuss your own individual circumstances and how the SIPP pension tax rules could affect you, get in touch with us today by making an enquiry and speak with one of the experts we work with.

What property purchase rules are in place?

SIPP property rules have been set out by HMRC and are very strict. They are as follows:

Residential property rules

If you were to put what HMRC deemed to be a residential property in your SIPP you could end up with a tax bill upwards of 50%. So even though you are able to, it may not be worth the hefty tax bill. If you wanted to invest in residential property then there are residential property funds available.

Commercial Property mortgage rules

Purchasing commercial property is also commonly called a SIPP mortgage.

When purchasing commercial property, the rules state that the property should be bought at market rate, rents must be charged at a fair market rate and any arrears must be pursued. This is in effect is to try and stop anything underhand.

Purchasing commercial property is proving to be more and more popular with small business owners who are now able to put their own commercial premises into a SIPP.

Some SIPP providers may limit the percentage of a SIPP that can be invested in property, making sure there is enough cash for fees and servicing.

Overseas property rules

The UK pension legislation now allows for overseas property to be held in a SIPP. However, there have been many instances over the last few years of overseas property investment schemes that are unregulated being pitched to UK SIPP investors.

There are many obstacles to overcome to stay inside the UK SIPP rules when investing in property overseas, so the best course of action would be to speak with an expert pension advisor so they could give you the best advice about SIPP taxable property rules.

What are the regular contribution rules?

Either you, your employer or both of you can make regular contributions into your SIPP.

There is a limit on the amount of contributions you can make per tax year which currently stands at £40,000 for most of us or 100% of your earnings, whichever one is the lowest figure.

What are the lump sum contribution rules?

You can choose to pay into a SIPP via lump sum payments if it suits your circumstances better. You have the same contribution limits as if you were making regular monthly, which is currently the lower of either £40,000 or 100% of your earnings per tax year.

What are the limited company rules?

If you are running your own business incorporated as a limited company, contributing to a pension can bring significant tax breaks. Pension contributions can be treated as an allowable business expense and offset against any corporation tax bill.

What borrowing rules do I need to know about?

SIPP borrowing rules, as set out by HMRC, are that the maximum a scheme may borrow is up to the equivalent of 50% of the net value of the fund.

What are the lending rules?

Just like a bank, a SIPP is allowed to grant loans, where you can lend to people or businesses at a set interest rate. SIPP loan rules for lending are not as strict as for borrowing.

SIPP connected party rules are very strict and state that loans must not be made directly or indirectly to connected parties. There are substantial tax charges if these rules are broken.

You can lend out up to 50% of the net value of your fund with some providers where a few may be able to offer more depending on the deal itself, but beware of the costs of setting up such a deal and do the maths to make sure it is actually worth it.

What are the withdrawal rules?

You are able to take 25% as a tax free lump sum or you may choose to take multiple lump sums and have the first 25% of every lump sum as tax free thus paying tax on remaining 75% of the withdrawal these are the basic SIPP cash tax free rules.

You are allowed to do this from the age of 55 and benefit from the tax free lump sum.

Very few providers will allow withdrawals from your SIPP prior to age of 55, but there would be hefty charges, not to mention the HMRC tax bill of 55% of the amount withdrawn.

Are there any income drawdown rules I should know about?

SIPP drawdown rules aren’t generally any different to withdrawal rules, except you may be looking for an income.

You might be looking at taking your tax free allowance of 25% as part of the flexible SIPP drawdown rules, and then purchasing annuities or a complete drawdown for an income into retirement. There are a lot of options out there  for income drawdown, so the best thing to do would be to speak to an expert pensions advisor who would be able to offer a tailored solution for your retirement income.

What are the age rules?

There are two main ages when discussing a SIPP: 55 and 75 (or simply at retirement).

Aged 75

At the age of 75, you are no longer permitted to make further contributions into your SIPP.

If you were to die before the age of 75, your untouched pension pots can be passed to your beneficiary tax free. Once the provider is notified, the money is transferred within two years of the death. Otherwise if the two year limit is passed the money would then be added to the beneficiaries’ income and taxed at the appropriate rate.

SIPP rules after the age of 75 state upon death if the beneficiary takes an income of lump sum from the pension pot they will be taxed at their appropriate rate.

Aged 55

From the age of 55, you are able to take from your pension whenever you like. You are able to drawdown the full amount as a cash lump sum (paying tax on 75%), you can take a tax free lump sum of 25% and leave the rest to grow, you can buy annuities or start drawing a regular income from it – the choice is yours.

What other regulations should I know about?

SIPP regulation in the UK is controlled and implemented by the FCA (Financial Conduct Authority) along with the DWP (Department of Work and Pensions), HMRC (Her Majesty’s Revenue and Customs) and the Pension Regulator.

The FCA has in recent years taken a hard stance with SIPP providers, insisting on far better vetting of investments giving much more security to account holders.

Any additional restrictions to be aware of?

There are a few restrictions that have already been mentioned in different sections above, but here is a rundown:

  • You can pay in up to £40,000 tax free or 100% of your earnings in a tax year whichever is the lowest, you may contribute more but without tax relief.
  • You are unable to get at the funds until aged 55.
  • You are unable to contribute after age 75.
  • You can only borrow up to 50% of the net value of your pot.
  • Unquoted share rules for a SIPP is that they are limited to 50% and the unquoted trading company must provide 3 years accounts as evidence.
  • You are only able to open and contribute to a SIPP if a UK resident.

Speak to an expert

If you have questions about SIPP rules or SIPPs in general and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry here.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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