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Taking stock

I am due to receive about 180,000 worth of company shares from a share scheme in place with my employer. I am aged 49 and I have the option of using these shares to make a contribution to my company’s pension scheme, which is a self-invested personal pension. Is this a good route to take?

The shares you receive, after payment of any tax and National Insurance due, can be paid directly into your Sipp on receipt. The shares will be classed as a net pension contribution, so basic-rate tax relief will be given immediately. This tax relief will be in the form of cash in your Sipp. Assuming that you are a higher-rate taxpayer, you can then claim higher-rate tax relief directly from your tax office.

So, if 180,000 is the actual value of shares you receive after any tax and National Insurance, then paying this into your Sipp will result in basic-rate tax relief of 45,000 which will appear in your Sipp as cash. You will then be able to claim another 45,000 in higher-rate tax relief which you will receive as cash outside your Sipp to spend or invest as you wish.

Within your Sipp, you could either continue to hold these shares or you could sell them and invest the proceeds in alternative allowable investments.

When you take the benefits of your Sipp, you will probably be able to take up to 25 per cent of the fund as tax-free cash. Assuming no growth for these purposes, this will equate to 225,000 x 25 per cent = 56,250. The remainder of your fund must be used to provide an income which will be taxable.

You can take the benefits from your Sipp at any time from age 50, increasing to 55 in April 2010. So, other considerations aside, you can take the tax-free cash next year.

Using this route, you will receive higher-rate tax relief in your hand of 45,000 and possibly a tax-free lump sum of 56,250 which totals 96,250. You will also have a pension fund to provide income of around 168,750. This does look very attractive from a starting point of shares worth 180,000.

Another advantage of holding the shares or alternative investments within a pension is that any gains produced will be tax-free, whereas holding the shares or alternative investments outside the pension could lead to a tax liability.

Whether or not you hold the shares/money within a pension can also make a difference to your inheritance tax position.

If you were to die before taking the benefits of your pension, the fund could be paid out free from IHT whereas shares/money held directly by you would form part of your estate and could lead to an IHT charge.

The situation is slightly different once you have vested the pension but the situation could still be advantageous depending upon what you decide to do at that time.

However, there are still a couple of things to think about before taking this course of action.

First, you should consider whether or not there are any restrictions from the share scheme that need to be satisfied. Second, your scope for making such big pension contributions should be considered.

The gross value of the Sipp contribution (225,000 with basic-rate tax relief) must be checked against the limit for pension contributions. During any tax year, you are able to receive tax relief on personal contributions to a pension of an amount up to your earnings.

Are your earnings big enough to warrant this contribution when added to any other pension contributions you have made or will make during this tax year?

There is also an overall annual allowance limit for all contributions to your pensions, which will include payments made by your employer, of 235,000 for this tax year. With ongoing contributions probably payable to your Sipp, you may be over this limit. If so, the amount of shares you can use in this way should be reduced accordingly.

You should also consider the fact that although the tax advantages of the pension contribution route lead to a higher total amount of money, a big proportion of it will be locked in a pension to provide an income and can only be withdrawn subject to pension rules at the time. Holding the shares outside a pension would provide you with the freedom to use the money as and when you wish.

Your personal circumstances and aims need to be assessed and taken into account before any specific advice can be given but the route of using the shares or a proportion of them as a pension contribution could be very worthwhile and should certainly be considered.

Emma Duncan is a director of Thameside


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