By BILL BLEVINS
SIPP – the pension for the sophisticated investor
LAST WEEK’S article covered many of the far reaching reforms in UK pension legislation due to come into effect from April 6, 2006, otherwise known as A-Day. This week, I am concentrating on one particular aspect of these reforms – the ability to invest in a Self Invested Personal Pension (SIPP) and take some enjoyment from the process.
A SIPP gives you more flexibility and control over your pension, and is described as a pension wrapper for the sophisticated investor. At present, a SIPP allows you to invest in insurance funds, equities, gilts, bonds and commercial property. From A-Day, you will have a much wider range of assets to choose from, both in the UK and overseas, including classic cars, paintings, yachts, fine wine and residential property.
Residential property can mean the home in which you live, rental property in the UK or a holiday home overseas.
You will be able to borrow up to 50 per cent of the value of your pension. So, if you have already built up a substantial fund, the future gains could be very interesting indeed. Not only that, but you will get UK tax relief of up to 40 per cent on your contributions – and, when you come to sell your asset, it will be exempt from UK capital gains tax. UK rental income is tax free.
So a fund worth £300,000 could raise a further £150,000 to buy property costing £450,000. Many people are thinking of increasing their pension contributions so that they can invest property into the scheme. Alternatively, the money you save through tax relief can be put aside to pay off the mortgage or left to accrue in the SIPP to buy more property or upgrade the property you already own.
The pension rules from next April will allow you to invest up to £3,600 in a SIPP or 100 per cent of your earnings tax free. You can then pay in further amounts up to the annual limit of £215,000 in the first year, but any contributions over the tax free allowance will be subject to UK tax.
The rules also state that if you buy property as your permanent residence and live in it, you will have to pay a market rent for it – a bit like paying rent to yourself. If you have the resources to reduce your estate by paying extra pension contributions as well as a market rent, you may be able to reduce your UK inheritance tax liability.
It will no longer be compulsory for you to buy an annuity by the age of 75. You could take a pension drawdown instead. One way to do this is by taking an Alternatively Secured Pension (ASP). It’s not like a conventional pension in that it doesn’t cease on your death. With an ASP, cash left in the SIPP becomes part of your estate when you die. It could be passed onto your beneficiaries or be taken as a dependant’s pension by your spouse or any dependant children under 23 in full time education.
For expatriates who own a home abroad, you could transfer the property into a SIPP. You will still have to pay a market rent for it, which will be free from UK tax, but you are likely to be subject to the tax laws of the country where you are living, such as tax on the rental income, capital gains tax, wealth tax and possibly local inheritance tax.
The same tax rules would apply if you are considering buying a property overseas as a permanent home or as property to rent. Even if you only use the property for yourself as a holiday abode for family and friends, you will need to pay the fund a commercial rent. There’s no getting away from it. Even if you don’t pay yourself the rent, you will be taxed on deemed benefit in kind.
Some people, who already own property overseas which they rent out, are not declaring the income to either the UK tax authorities or to the relevant country’s tax department. This, of course, is illegal and needs to be rectified, particularly if you wish to take advantages of a SIPP.
Whether you sell property in the UK or abroad in order to transfer into a SIPP, beware of instigating capital gains levy on the property sale, or stamp duty on the purchase. The property is only free of UK taxes when it is held in the SIPP. Just your principal private residence is exempt from capital gains when sold outside the SIPP. It is worth knowing that partial transfers of property are possible each tax year, and this includes the exemption of capital gains tax on your principle private residence.
SIPP providers have been reporting a surge of interest from people keen to know more about A-Day. A number of re-mortgage applications have already been received in an effort to release investment funds for the new SIPP. If you already have a sizeable fund, you are off to a head start. There are exciting opportunities ahead for the astute investor to increase his pension fund and not be liable for tax.
The radical new rules are simple yet complex. A professional financial adviser will be able to guide you through all the aspects of the forthcoming new pension legislation and help you to decide the most beneficial way for you to get the most out of your SIPP.
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