July 2007

Controlling savings

Following the changes in pension scheme regulations from 6 April 2006, individuals now have the ability to contribute far more to their pension fund than previously, and qualify for full tax relief.

In any tax year an individual can contribute an amount up to 100% of relevant UK earnings into a pension scheme and attract tax relief, subject to an annual allowance.

This allowance was set at £215,000 in the 2006/2007 tax year and will increase to £255,000 by 2010/2011 tax year. (This year it is £225,000). Basic rate tax (currently 22%) is reclaimed by the scheme administrator from HM Revenue & Customs (HMRC) directly into the pension scheme, and if the individual is a higher rate tax payer the additional 18% is reclaimed through their self assessment.

The option of a bonus sacrifice, where the employee gives up their contractual rights to a bonus in return for the company making a gross contribution to a pension scheme for the employee, is becoming increasingly popular. The employee benefits from not paying tax on the bonus amount and the employer benefits from the national insurance relief available.

People are fed up with run of the mill insured schemes where they have to invest in the company's restrictive funds and many such members have been caught out by the 'with profits' trap and the MVA (market value adjuster) which reduces their fund value at transfer to another provider.

Professionals may now be looking to take control of their pension provision, and they need good quality advisers to work with them to maximise their returns and develop an open plan pension scheme. This can be achieved with a self invested personal pension (SIPP) that offers a full open architecture utilising diversified asset classes across the best of breed investment houses.

Reviewing pension provision

This may be the time to review clients' current pension provision and change to a SIPP framework, which lends itself to people who want to take control of the investments and diversify their assets. A SIPP is essentially a wrapper within which a range of different asset classes may be legally held, and grow tax free in preparation for the individual's retirement (when benefits generally may include the payment of a tax free lump sum, normally of 25% of the pension fund at that time).

Commercial property is a particularly important asset class, and is becoming increasingly popular as the new tax rules allow greater flexibility. Individuals can gain exposure to property in their pension schemes in a number of ways, both commercial and residential and in the UK and abroad.

With residential property, exposure can only be achieved indirectly through investment in an arm's length investment vehicle, meeting certain requirements (what HMRC calls a 'genuinely diverse commercial vehicle').

The adviser has to work with a specialist provider to ensure there is no risk of tax charges where genuinely diverse commercial vehicles are being used to hold residential property investments.

Clients may well own commercial premises which could potentially be assigned to their pension schemes in lieu of a monetary contribution, on which basic rate tax would be claimed from HMRC and added to the pension fund for further investment. Any higher rate tax relief due is then reclaimed via the member's self assessment. There is currently a dialogue going on with HMRC about the technical requirements of achieving this to ensure compliance with the tax rules.

Or they may have located a commercial property from which they wish to run their business, and an option is for these premises to be purchased by their SIPP. Indeed the property may be potentially jointly owned by the SIPP and the members in a personal capacity, provided certain conditions are met. That part of the property which is owned by the pension fund would be free of capital gains tax at the point of sale, and generally there would be no issue with inheritance tax.

The clients or their businesses may own a commercial property, they may wish to utilise to expand their business and create liquidity. They could solely or jointly purchase the property from themselves or their business through their individual SIPPs. The purchase price and subsequent lease back to the business must be at market value.

Borrowing is allowable to assist in the purchase and this may be up to 50% of the net fund value just prior to the purchase (taking into account any existing SIPP loans for the member). All legal costs and expenses may also be paid by the SIPP.

Rental income received would be used to service any loan and any amount received over these payments can be distributed to each member's personal SIPP account for investment.

Since the rule changes in 2006 there has also been much interest in the ability to invest in unquoted shares. This is an area again which needs to be properly advised on and an area that can be fraught with problems leading potentially to tax charges. Any adviser needs to understand the complexities of these transactions.

Christine Hallett
Chief Executive
Pointon York SIPP Solutions