Standard personal pensions have not really changed in the many years they have been available but SIPPs are at the dynamic end of the scale. The bespoke SIPP end of the market is not only opening up to new investment options but some historically fringe options are becoming more mainstream and available through trusted providers.
There is also, however, discrepancies as to what is classed as a SIPP. You can now go all the way from a SIPP with one foot in the insured pension arena to those specialising in just gold or overseas property. If you take the middle ground, you will find yourself in the space of platforms. The platform/wrap SIPP is one of the quickest growing areas in the SIPP market and is likely to cater for the majority of investors in time. But there is more to SIPPs than collectives and a true SIPP will still offer options to those that need or want to use them.
That is the real beauty of SIPPs – they have the flexib-ility to evolve over time to meet changing requirements of clients and their advisers.
Research conducted by Suffolk Life in 2009 indicated that flexibility of the SIPP provider is key to a good working relationship. Providers need to listen to what the advisers want. We have been told that advisers are interested in private equity and in-specie contributions. Looking at graph 1 (right), it is clear that a number of advisers we asked place more importance on some investment areas than they actually recommend. This is not a surprise given that it must be suitable for the client at the time.
When considering private equity for SIPPs, it is probably easiest for the investor to divide them into two distinct categories. First, investing in a company they have established, manage or just work for. These assets are usually already held by the individual and are likely to be of great risk to a pension fund if held in isolation because of a lack of diversity.
The other category would be to use an investment manager that invests all or some of their port-folios in private equity. The risk is still high – it is expected that a number of the companies will fall in value or even fail. Equally, some companies will excel, growing dramatically and thus rocketing in value. As ever, a strategy of diversification spreads the overall risk but still requires a good knowledge of the markets involved.
There are a number of risks associated with private equity in a SIPP, namely falling foul of the taxable property rules (tangible movable assets). They can be difficult and costly to value and can be illiquid.
Out of the advisers in our research conducted in 2009, 56 per cent felt that in-specie contributions into a pension product are important or very important, and for good reason. In-specie contributions can be a great way to get money into a pension scheme for those that have little available cash but assets in their own or their company name. The thing to bear in mind when jumping through the hoops of in-specie contributions is that technically they are not allowable and all the processes are in place to ensure HMRC are confident the asset is truly in lieu of a cash contribution that has been expressed as a monetary amount. (See graph below).
There are a number of stages involved in an in-specie contribution and it should always begin with a lengthy discussion with an adviser. Areas that should be covered include tax implications, what happens if the value of the asset drops suddenly and the process. First, let’s have a look at the process for making an in-specie contribution. Because the contribution is deemed to init-ially be intended to be made in cash, HMRC does not want the asset and the contribution connected at outset. Checking the allowability with reference to a contribution is not really an option so the first part of the process is to contact the provider stating that the individual wishes to make a pers-onal or employer contribution to the pension scheme.
Obviously, at this stage, no money changes hands. It is likely to be clear that an in-specie contribution is intended but strictly speaking it still should not have been mentioned. The provider will then request the contribution be made but when there are no funds to do so, they will establish an irre-vocable debt. This will require the individual or company to commit to pay the previously mentioned amount as a contribution.
Once this is all signed and sealed, the individual can offer to cover the debt with an asset. There are no restrictions on the asset to be contributed except that it is allowable by the scheme rules. The assets can then be re-registered in the name of the scheme trustee. At the date this happens, the value of the asset is set against the contribution debt. The date for tax relief is also the date the scheme receives the asset and it is the value of the asset on the date received that is used in the reclaim. This is an important point because the contribution can fall into the wrong tax year if delays are experienced for any reason.
What happens if the value has dropped and does not cover the debt? This is where it can get sticky. The provider must actively seek payment of the debt. This could be in two ways – more assets can be used to pay the debt and again take the chance of fluctuating values or a cash amount can be paid to cover the remainder. If the cont-ributor has no further assets or cash to pay, potentially the provider would be forced to take their client to court for non-payment.
Hopefully, in most cases, it would not come to this. The biggest danger could be an in-specie property contribution, where there is always the danger that something unforeseen to the individual could be discovered by the provider’s solicitors and they may refuse to take the asset. The associated contribution is likely to be significant and therefore the contributor is unlikely to be able to make up the contribution with cash.
The worst-case scenario would arise where the contributor is unable to pay and the contribution could be classed as an unauthorised member payment, creating income tax charges on the individual (even where it is an employer making the contribution) and additional charges to the scheme. This is not a reason to avoid in-specie contri-butions but more something to be aware of. Research into the asset is essential prior to committing to a contribution and additional survey costs could really be worth it in the long run.
There is also the flip side of the contributed asset increasing in value and again you have two options. First, the difference can be treated as a contribution and the tax reclaimed, or the assets/cash equivalent can be refunded to the contributor. Other things to consider when making an in-specie contribution are the associated tax charges. When the asset is contributed to the scheme, it is a disposal for capital gains tax purposes and will attract any appropriate CGT charges. On the other side of the transaction, stamp duty, if applicable, will need to be paid and accounted for.
Are the risks worth it?
The flexibility of a true SIPP is its biggest attraction and to that end these options have their place. The risks need to be weighed up with the benefits which can be significant if used correctly. Private equity investments normally come with a high-risk tag but the profits can equally also be high. Using a SIPP as a vehicle to invest in them means, as with other assets, any capital gain is exempt from tax. Little wonder that demand for private equity within SIPPs is growing at such a pace.
In-specie contributions open up the option for those that would not have been able to contribute due to lack of cash, provided they know the provider well and the correct processes are in place.