Now that we know more details of the proposed tax regime applying to pensions from April 2011, the race is on for IFAs to ensure their clients are well positioned to make the most of the new rules.
Despite the reduction in the annual contribution allowance from £255,000 to £50,000 and the lifetime allowance from £1.8m to £1.5m (in April 2012), skilful usage of the three-year carry forward provisions, together with pension input periods, provide IFAs with some powerful financial planning opportunities for their clients.
Marginal tax relief will allow higher-rate and top-rate taxpayers to benefit from 40 per cent or 50 per cent tax relief on employee contributions up to the £50,000 overall contribution limit. The new carry forward provisions mean that any unused allowance for up to three years (for tax years 2008/09, 2009/10 and 2010/11) may be carried forward using an assumed annual allowance of £50,000.
This will be of huge benefit for clients in receipt of fluctuating earnings – commission, bonuses, the self-employed and those who are selling business assets as they near retirement.
As pension input periods will not change, money-purchase pension schemes will continue to be able to determine the input period which is not required to dovetail with the tax year.
The new lifetime allowance is not scheduled to apply until April 2012 and we await the details. We do know, however, that the Government is planning to introduce protection for scheme members whose fund size breaches the reduced £1.5m limit. But it could also bring in retrospective restrictions on funds to stop people making large contributions ahead of the change with the aim of bene-fiting from that protection later.
By combining carry forward of up to £150,000 (minus any contributions already made) for the current and last two tax years plus the £50,000 annual allowance for 2011/12, a pension member could potentially put up to £200,000 into a scheme on a single day next April. They could then elect to end the current pension input period and to contribute another £50,000 in the new one starting the following day.
That makes £250,000 of contributions over two days although it does depend on factors such as the employee being a member of a registered pension scheme and having sufficient scope to make the contributions possible.
This could be particularly useful for Sipp investors intending to purchase commercial property and needing to bulk up their scheme assets quickly.
A husband and wife running their own business and wishing to purchase commercial premises could, if they both made the maximum £250,000 contribution as described above, create a £500,000 pension. They could then borrow a maximum of 50 per cent of their schemes’ net assets – a further £250,000 – to free up £750,000 to fund a property purchase. Any existing pension assets could be transferred in to boost this further.
The couple could use this to buy part or all of the premises from their own business, which would release cash back to the business for investment. The business may have to pay capital gains tax on the sale.
Where a business wants to retain cash, it can make an in-specie contribution of commercial premises (or a part of them) to its directors’ self-invested pensions. The contribution would need to be within each director’s annual allowance (plus any unused carry forward) to prevent the member facing a tax charge on the excess.
Again, the contribution of the premises by the employer would be considered a disposal for CGT purposes and it would need to be made before the end of the company’s tax year if the business is to benefit from corporation tax relief in that year.
But once the premises are wholly or partly in a member’s Sipp, the comp-any will pay rent on a proportionate basis to the pension scheme which will be deductible as a business expense for the company.
Where clients are not currently a member of a registered pension, it could be worth setting them up in one even if they do not make any contrib-utions because it secures the possibility of using carry forward unused allow-ances to subsequent years.
It is worth bearing in mind that although the rules give a great deal of freedom, not all Sipp providers will do the same, especially in more complex areas such as non-standard property, part-purchase, in-specie contributions and pension input periods.
IFAs need to ensure that the provider is willing and able to do so at a reasonable cost and has the necessary experience and administrative expertise to ensure that the purchase goes through smoothly.