SIPPs – take control of your pension – guide for directors

Unlike employees with access to workplace pensions, as a limited company director, you have much greater control over how you save for retirement.

One of the most tax-efficient ways to do this is via a Self-Invested Personal Pension (SIPP).

A SIPP lets you take control of your pension investments, while also benefitting from tax relief.

What is a SIPP?

A SIPP provides great flexibility in terms of investment choices and how funds are invested and withdrawn.

You can choose from a wide range of assets to include in your SIPP,  such as stocks, bonds, funds, and even commercial property.

A SIPP is suitable for people who want a greater degree of control over their pension investments, making it an ideal choice for company directors who are comfortable making financial decisions.

Interactive Investor (ii) is a popular fixed fee UK SIPP provider – ideal for limited comany directors. You can find out more here

Benefits of a SIPP for directors

Here are some of the key benefits of opening a SIPP

1. Tax relief on contributions

• Corporation Tax Relief: Pension contributions from your company are usually an allowable business expense, according to HMRC rules. This reduces your company’s corporation tax liability.
• Personal Tax Relief: If you make contributions from your personal income, you can claim tax relief at your marginal income tax rate.
• Tax-Free Growth: Your pension is not subject to income tax or capital gains tax.

2. Gives you flexibility

• You can choose from a wide range of investments, which include:
  • Stocks and shares
  • Investment funds
  • Government and corporate bonds
  • Exchange-traded funds (ETFs)
  • Commercial property (such as office space or warehouses)
• This flexibility allows you to tailor your pension investments to suit your risk appetite and financial goals.

3. Most pension assets are protected (but you need to check!)

• Most investments in a SIPP are protected from creditors in case of financial difficulties, but you must make sure that your provider is regulated by the Financial Conduct Authority (FCA) and your investments are covered by the Financial Services Compensation Scheme (FSCS). Some high-risk investments are not covered, so seek financial advice first.
• SIPPs are not subject to inheritance tax (IHT) if structured correctly (although the government plans to place unused pension funds subject to IHT after April 2027).

4. More control over retirement planning

• You have complete control over when and how you withdraw funds from your SIPP after age 55 (rising to 57 in 2028).
• Withdrawal options include taking lump sums, drawdown, purchasing an annuity, or a combination of options.

How to make contributions to your SIPP

1. Employer Contributions (Company Contributions)

• Your limited company can contribute to your SIPP as an employer contribution.
• These contributions are considered an allowable business expense, reducing the company’s corporation tax bill.
• Your company does not pay National Insurance Contribitions (NICs) on employer contributions.

2. Personal Contributions

• You can also contribute personally from your post-tax income as an alternative to company contributions.
• You will receive tax relief at your marginal rate (20%, 40%, or 45%).
• Contributions are subject to the annual allowance (currently £60,000 per year for most people).

Pension contribution limits and allowances

• Annual Allowance: The standard contribution limit is £60,000 per tax year (as of 2024/25). if your adjusted income for the tax year exceeds the adjusted income limit (currently £260,000), your annual allowance will be reduced.
• Carry Forward Rule: You can carry forward unused annual allowances from the previous three tax years, although you must have had a pension during the years in question, even if you didn’t use your full allowances.
• Lifetime Allowance (LTA): The LTA was abolished in April 2023. This means that there is no upper cap on pension savings subject to additional tax charges.

How to withdraw funds from your SIPP

You can start withdrawing funds from your SIPP at age 55 (57 from 2028). Your options include:

1. Take a tax-free lump sum: You can withdraw 25% of your SIPP tax-free. The Lump Sum Allowance (LSA) is £268,275 – which is 25% of the old ‘Lifetime Allowance’ limit.
2. Flexible drawdown: Withdraw as much or as little as you need. Any money you withdraw is subject to income tax.
3. Purchase an annuity: Convert your pension into a guaranteed income for life.

Key considerations before you open a SIPP

1. You take on a degree of risk

• Unlike a workplace, personal or stakeholder pension, a SIPP requires you to make specific investment decisions. If you’re not confident, you should always seek financial advice, or consider a different type of pension.

2. How much does the SIPP platform charge?

• SIPPs may have higher fees than standard pensions, especially for managed funds or commercial property investments. However, this is not always the case. Make sure you work out the real cost after transaction and monthly fees are taken into accoung.

3. Changes to regulations and tax rules

• You need to keep updated with any changes to pension rules, contribution limits and allowances.

4. Do you have an exit strategy?

• Plan how and when you will start accessing your pension fund.

Steps to set up a SIPP

Setting up a SIPP is a surprisingly simple process:

1. Choose a SIPP Provider: Popular providers include Interactive Investor (ii), AJ Bell, Hargreaves Lansdown, and Vanguard.
2. Decide on contributions: Determine how much you want to invest – either via your company, or from your personal funds.
3. Choose your investments: Choose your investments.
4. Review your investments regularly: Monitor your SIPP’s performance and make changes where necessary.

The Which? Recommended SIPP from ii

At LCH, we have partnered with Interactive Investor, a Which? Recommended Self-Invested Pension Provider (SIPP) provider.

Interactive Investor charges a low fixed monthly fee – not a percentage of your pension pot.

You can find out more here.