Medicaid and Medicare

Archive for the ‘Pension’ Category

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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Despite the quite considerable contributions individuals are likely to be making to them and the accumulated value they are likely to have, it is surprising how few people keep an eye on how their pension fund investments are doing. The contributions are made on the same monthly basis, come what may, regardless of the investment’s comparative performance. It seems that many people give no thought to the possibility of pension transfers and whether such a move would make sense for them.

Whether a pension transfer is something you should be considering, of course, will depend on the performance of your current pension fund. Together with your home, this is likely to be one of your larger investments and, as with any investment, you will want to make sure that your hard-earned money there is working as hard for you as it possibly can. With the value of your home, for example, you probably follow every twist and turn of local property prices and keep a fairly close watch on just how much it is worth. How many people do the same with their pension investments?

With your pension fund, it is not just the overall value and performance you will be interested in. Have you recently reviewed what management or administration fees you are paying? Could you get a better deal for less?

Ready to transfer?

If you believe it is time for a change, there are one or two things you should definitely do first before committing yourself to a transfer:

- Above all, do not consider transferring your pension without seeking the expert advice of a registered independent financial adviser;

- If you have not done so already, one of the first things your adviser will ask to see is a transfer value analysis. As the title suggests, this is an analysis which allows you to compare the value and performance of your current pension investments with the alternatives. It should include a figure called the “critical yield” (typically somewhere between 7% and 11%) which tells you how fast any replacement scheme would need to grow to match the performance of your present scheme. A good rule of thumb will be a figure of 8%. If your present scheme is returning anything less than this, then you might want to take the idea of a pension transfer further;

- What are your intentions regarding retirement? When do you hope to start drawing on your pension? If you are planning to retire early, for example, you will need to ensure that any replacement scheme to which you are intending to transfer is sufficiently flexible to allow this;

- With the help of your independent financial adviser, you will naturally want to check again the current financial position and performance of your present scheme. In the event that it is showing a surplus, with a higher value on assets than liabilities, then it could well prove worthwhile staying with your present pension fund.

Summary

It is certainly worth reviewing and monitoring your pension fund in the same way that you would any other investment, to consider the potential benefits of a pension transfer:

- Financial performance, management costs and flexibility might be a useful basis for comparison;

- Before doing anything, however, make sure that you seek the services of a reputable, independent financial adviser;

- Get a transfer value analysis of your current pension scheme;

- Take into account your actual retirement plans and any intention you might have to retire early.

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Financial Markets (ECON 252) Most people are not very good at dealing in financial markets. Professional money managers, such as financial advisors and financial planners, assist individuals in matters of personal finance. FINRA and the SEC monitor the activities of these managers in order to protect individual investors. Mutual funds, exchange traded funds also exist to assist individual investments, and pension funds provide further services. These investment institutions help people to put money in diversified portfolios and, in some cases, reap some tax benefits for funding their retirement income. Complete course materials are available at the Open Yale Courses website: open.yale.edu This course was recorded in Spring 2008.

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