Monday, April 21, 2008

To SIPP Or Not To SIPP? - More Pension Options Explained

To SIPP Or Not To SIPP? - More Pension Options Explained
We have been seeing a lot of enquiries from clients wanting
to know if a Self Invested Personal Pension (SIPP) would be
appropriate for them.

Let's look at an example to illustrate this.

Let's say you have several personal pensions, some separate
share investments and an investment property. How can you
use a SIPP to invest in the shares and the property?

A SIPP allows greater control of pension investments and a
wider range of options. This means that, subject to what
legislation will allow, you can decide when, where and how
to invest your pension contributions.

By using a SIPP, you are able to access investment funds
which are managed by the full range of fund managers. You
will also be able to invest your fund directly in stocks
and shares, commercial property and other assets.

To assist with this, the fund will be able to borrow up to
a maximum of 50 per cent of the net assets of the scheme.
However, it should be noted that when borrowing to help
fund a property purchase, the SIPP will also need to cover
all associated costs such as stamp duty and legal fees.

As well as buying a new property, the ban on connected
party transactions that was lifted by HM Revenue & Customs
on April 6, 2006 means that if you already own a commercial
property, you can either sell the property to your SIPP or
pass the property to your SIPP as an in specie contribution.

Technically speaking, it is not possible for property,
shares or other allowable assets to be passed to a scheme
as a contribution. However, the Revenue has confirmed that
it is possible to say: "I am going to contribute
£100,000 to my SIPP and to discharge this obligation
I give my SIPP this property or these shares."

Where the allowable asset is passed to a scheme, the
contribution will benefit from tax relief limited to the
higher of earnings or £3,600 gross, rather than the
full value of the asset.

When passing a property to a pension scheme as a
contribution, any outstanding mortgage will need to be paid
off before the property can be moved into the pension
scheme.

But where you own an existing property, what is the best
option?

The in specie transfer might appear to be the more
attractive of the two because tax relief is available on
the contribution. However, the major drawback with this
method is that the mortgage must be paid off before the
transfer can proceed.

Investors wishing to benefit from tax relief on the full
value of the property will need to have earnings that are
at least equal to the value of the property. It would
therefore appear that the most practical method of moving
property into a pension is likely to be to build up a fund
first and then buy the property.

In relation to share ownership within a SIPP, the following
points should be noted:

- The SIPP or connected parties cannot own over 50 per cent
of the shares of the company

- Shares acquired under savings-related share option
schemes or share incentive plans are allowed by the Finance
Act 2004 to be transferred to a pension scheme and these
will automatically qualify for tax relief as contributions
if they are rolled over into the pension scheme /
arrangement within 90 days of the member becoming the owner

- The purpose of the investment must not be for the SIPP
member or a connected party to use the company's assets

- The company's main activity must be trading

The transfer is in effect a contribution, so it is entitled
to tax relief in the normal way. If the contributions would
normally get tax relief at source, basic rate tax relief on
the value contributed will be paid by HMRC into the plan,
with any higher rate relief being claimed through
self-assessment.

The person transferring the ownership of the asset will be
liable for any capital gains tax on any gain in the asset
since he/she acquired it. They may also be liable for stamp
duty.

The simplest way of making a contribution to a pension
scheme equal to the value of assets held would be to sell
those assets and pay the proceeds into the pension plan.

This avoids the potential problems with an in specie
contribution and allows someone who does not initially have
the cash to make a substantial contribution to their
pension scheme. Tax relief will be given on the
contribution as normal, assuming the gross contribution
does not exceed their UK earnings. Capital gains tax and
stamp duty may be payable on the sale of assets.

The disadvantages are that the assets do not end up in the
pension scheme, unless the pension scheme subsequently buys
the assets. This could involve delay and values may have
moved in the meantime. If the asset was a property, of
course, it might not be available for sale.

The Financial Tips Bottom Line

If you are considering the SIPP route, make sure you do
your research in advance as this area can be a minefield!

Also, there are a number of SIPP providers so make sure you
look at what type of SIPP you need, as well as checking the
small print before you sign on the dotted line.


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Ray Prince is an Independent Financial Planner with
Rutherford Wilkinson plc, and helps UK Resident Doctors and
Dentists get the best deals on mortgages, protection and
investments, as well as helping them achieve their
financial objectives. Just visit
http://www.medicaldentalfs.com to get your free retirement
planning guide. Rutherford Wilkinson plc is authorised and
regulated by the Financial Services Authority.

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