Ethical Self Invested Personal Pensions
A SIPP is a Self Invested Personal Pension that allows you to choose where your pension funds are invested. It offers a flexible and cost effective personal pension scheme giving you the ability to invest your pension fund assets in areas other than insurance company pension funds. You have the flexibility to pay contributions at whatever level you choose within HM Revenue & Customs limits. The wide range of investment powers which can be accessed from within the SIPP wrapper include direct investment within the stockmarket, access to a wide range of unit trust funds, discretionary fund management and direct investment in commercial property. You can combine equity, bond, property and cash funds in whatever proportions suit your goals and your attitude to risk.
For details on the funds available, please refer to the Ethical Fund Supermarket section of the web site. Please note that it is possible to mix non ethical funds with ethical funds under the wider investment powers which a SIPP can offer.
Reasons for choosing SIPP
For many people, SIPPs have become especially attractive since the introduction of new rules for pensions in 2006:
- As an alternative to buying an annuity by their 75th birthday, pension investors can now continue to take income beyond 75 for life on what is known as an "alternatively secured" basis, allowing their fund to remain invested. A SIPP gives investors the freedom to optimise the level of income they wish to take to suit their requirements.
- Tax relievable contributions can be made up to 100% of earnings invested in a tax efficient environment. The government has however set an Annual Allowance of £215,000 for contributions and excessive contributions made above the Annual Allowance will trigger a personal tax charge on the member.
- The new contribution limits mean that an occupational scheme member can now invest in as many pension schemes as they wish and are no longer restricted to Additional Voluntary Contributions as a means of building up enhanced retirement benefits.
- If you apply for means-tested benefits, your pension fund will not be counted with your savings.
- If you are declared bankrupt, your pension fund is usually protected from your creditors.
Stakeholder pensions are low-cost, private pensions that became available on 6 April 2001. Stakeholder pension schemes must meet minimum standards set by the government on charges, flexibility and information. The upper limit on charges is 1.5% per annum of the value of your fund each year for the first 10 years, thereafter reverting to 1% per annum.
A Stakeholder pension works in a similar way to most personal pensions where you use your own money to build up your pension fund. Your scheme invests your contributions in stocks and shares and, when you retire, you use this fund to buy a pension from a pension provider.
Stakeholder pensions are available from insurance companies, banks, investment companies and building societies. Other organisations such as trade unions may also offer stakeholder schemes to their members. If you are employed in a company with five or more employees, your employer must provide you with access to a stakeholder pension scheme. Exceptions to this include employers that offer an occupational pension scheme for all their employees to join within one year of them starting work.
At Axxis Financial Planning, we wholeheartedly support the Stakeholder plan, and are keen to advise individuals as well as groups of employees to establish their own ethical stakeholder plan. Axxis has access to the best of the ethical Stakeholder pension plans currently available. Indeed, some of the plans we are able to offer to our clients are not available direct from companies and some are not available through other advisers. Hence, our clients benefit from the broadest range of funds and the best financial advice.
The last decade has seen a significant increase in the number of ethical options available. Trustees of both Stakeholder and Occupational Pension Schemes to declare in a Statement of Investment Principles if and how "social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments". You can request to see a Statement of Investment Principles from any Life Office running a Stakeholder pension scheme.
Funding for Retirement
Pension contributions receive initial tax relief at your highest marginal rate of income tax. Contributions are said to be "grossed up", which means they receive immediate tax relief on their pension contributions. For instance, a higher rate taxpayer receives tax relief on contributions at their highest marginal rate of income tax, which is 40%. Hence a £600 pension contribution after tax relief is "grossed up" to £1,000.
You can claim tax relief on payments into pensions equal to 100% of income, up to an annual limit of £215,000. This limit is set to rise each tax year up to 2010, when it will be reviewed again.
Non taxpayers and children can receive basic rate tax relief, even though they have not paid tax in the first place. They can contribute up to £2,808 per annum which is then "grossed up" after tax relief to £3,600.
It is now allowable to set up and contribute to a personal pension whilst being a member of an occupational pension. You may be able to invest more than you can through your occupational pension's AVC scheme and if you opt for a SIPP, it will almost certainly give you more investment options.
There are a range of tax charges which apply to pension funds worth more than £1.5 million.
It is no longer necessary to retire or change employers before drawing tax free cash from pensions after you reach the age of 50. By 2010, the Government intends to raise the minimum age at which pension benefits can be drawn to age 55. There is no compulsion to take an income from your pension if you do opt to take out your tax free cash. In addition, you can avoid historically very low annuity rates by opting to draw an income directly from the pension fund. This is known as an "unsecured pension", or income drawdown. The downside of drawing your income directly from your pension fund is that the capital and hence income are not guaranteed- they are subject to the volatility of the underlying assets. The majority of retirees opt for annuity purchase as a guaranteed way to purchase an income for life.
Since April 2006, it is possible to take 25% tax free cash from types of pension which previously did not attract tax free cash. These would include "additional voluntary contributions" (AVCs), "free standing AVCs" (FSAVC's) and "protected rights" pensions which are funded by contracting out of the State Second Pension (S2P), formerly known as the State Earnings Relating Pension Scheme (SERPS).
Recent government legislation introduced in July 2000 includes a requirement for ALL pension scheme trustees to declare the extent to which ethical considerations are taken into account in the acquisition, retention and realisation of shares. It is also a requirement to declare how voting rights are exercised.
The law & occupational pension schemes
Under an amendment to the 1995 Pensions Act that came into force in 2000, the trustees of occupational and local government pension schemes have to state their policy on socially responsible investment in their Statement of Investment Principles (SIP). This includes:
- "...the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments;
- and their policy (if any) directing the exercise of rights (including voting rights) attaching to investments".
This does not mean that trustees have to take account of social or environmental concerns within their investment strategies, but they are obliged to state whether or not they do so.
The impact of this is twofold. On the one hand it has raised awareness of the implication of ethics among trustees. And on the other hand it is raising awareness amongst pension scheme members. On discovering that their pension does not have an ethical policy as stated in the SIP, many pension fund members have started to lobby trustees.
Is your pension fund investing ethically?
To find out if your pension has an ethical/socially responsible investment policy you will need to look at its Statement of Investment Principles (SIP). Depending on your pension, this may be sent to you automatically or you may need to request it. You should receive a mini-report from your pension scheme every year. It should contain details of how to request a copy of the full annual report. The SIP is normally contained with this annual report, though it can be a separate document.
In practice, although most large pension funds are now opting to have an ethical, or socially responsible investment (SRI) policy, the way they approach it varies. The trustees of larger pension funds tend to ask their fund managers to study the financial implications of applying ethical, social and environmental criteria across the whole range of a particular fund. Sometimes they also ask them to engage, on the trustees' behalf, in dialogue with companies.
We are able to provide advice on various strategies for fulfilling this requirement, in addition to offering an ethical screening service.
Five steps towards your own ethical policy
- Check the current position of your charity. Establish a list of any activities, (arms sales, tobacco production, for example) that conflict with your charity's objectives. Check that none of your donations, support and work are being damaged by current investments. And check your Trust Deed - does it say anything about socially responsible investment? Existing deeds can be changed; contact the Charity Commission and seek legal advice about doing this.
- Consider the best ways to build an ethical policy for your charity. You don't have to start with an all-or-nothing policy. It might be appropriate for your organisation to start with a limited but well-defined list of objectives from which a policy could be built. Look at the policies drawn up by similar organisations and establish what would be best for yours.
- Canvass the views of donors, beneficiaries, staff and other stakeholders. Your supporters and beneficiaries are stakeholders. Their views should be taken into account. Any socially responsible investment strategy will have to be written down and approved. If you decide to go ahead, think carefully about whether you have the time and resources to see it through. You may need a management mechanism, like a sub-committee, to regularly review the ethical aspects of your investments.
- Seek expert advice on finance, law and management. Your existing fund manager may have experience of socially responsible investment. If not it may be worthwhile finding one that would be willing to help you put your policy into effect. There are several statutory duties that a charity trustee must adhere to when investing charitable funds. The Charity Commission outlines your legal requirements in their pamphlet, CC14 - Investment of Charitable Funds: Basic Principles. In addition to this it is important to seek legal advice. Your organisation may benefit from help in thinking through the foundation and scope of your policy and the best way to practically implement and maintain it.
- If you have an existing policy, is it being properly monitored? It is all very well establishing a socially responsible investment policy, but it will be rendered useless if information is not kept up-to-date. And there should be a way of getting information about the actual performance of companies, other than relying solely on those companies. Other sources could include official databases, campaign groups, and independent research bodies like EIRIS.
A SustainAbility/ MORI survey in June 2000 found that nearly two thirds of pension scheme members wanted their trustees to actively apply social, environmental and ethical criteria to their investment decisions. This survey also found that three out of four scheme members want pension fund trustees to use their voting power to encourage greater environmental, social and ethical accountability from the companies in which they hold investments.