SELF-INVESTED personal pensions (Sipps) are set to become the hot financial product after the simplification of pensions on A-Day, which is April 6 next year.
There are already about 120,000 Sipps, worth £20 billion in total, but this figure is expected to rise by as much as 20 per cent a year. While any new enthusiasm for pensions is to be welcomed, some experts are concerned that certain aspects of the A-Day revolution have not been as well publicised as popular moves such as allowing residential property to be held within Sipps. Times Money answers your questions.
I have a personal pension plan and have contracted out of the state second pension. I am interested in diversifying my pension fund investments after A-Day and would like to do so by investing in a Sipp. Is this possible?
Unfortunately, only part of your fund can be transferred to a Sipp, thanks to the decision by the Department for Work and Pensions (DWP) to continue to block the investment of protected-rights funds in Sipps.
Protected rights are the rights built up in contracted-out final salary and personal schemes in lieu of state benefits. Millions of people have protected rights within their pension funds and for many they make up “a significant proportion” of the transfer value, says John Moret, of Suffolk Life, the insurer.
This is particularly so for occupational pensions because all final salary benefits accrued after April 1997 are treated as protected rights in a transfer from a contracted-out scheme. Mr Moret says that it is impossible to find out the total value of protected rights, but it is certainly billions of pounds and probably tens of billions.
So why are these funds barred from Sipps?
Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser (IFA), says: “The DWP, with a little encouragement from the Association of British Insurers, has ruled that inappropriate risks should not be taken with what represents substitute state benefits.”
The DWP has ruled that insurance company funds are the only allowable investments, but Sipp providers believe that this is misguided.
Mr Moret says that the DWP’s argument that investment in insurance company funds is “safer and more secure” than investment in other types of asset is “pretty shaky”. He adds: “Some funds are safer, but you could hold any unit-linked investment, including an emerging markets fund, for example, where the risks are at least as great as they would be in some investments that are not allowable.”
Mr McPhail agrees. “Protected rights are invested in contracted-out final salary schemes, which can go bust. They can also be invested in with-profits funds, some of which have lost 40 per cent of their value. Or they can be invested in Brazilian nut mining funds. You can lose your money just as easily through a unit-linked investment.”
The DWP has carried out a consultation on the issue and is likely to publish its conclusions within two months. Malcolm Cuthbert, director of financial services at Killik & Co, another IFA, says: “The industry is putting pressure on the DWP and it is possible that it might change its mind. Common sense demands it.”
Will I be able to leave my pension benefits to my children when I die and will this money be subject to inheritance tax (IHT)?
Mr Cuthbert says: “Pension simplification rules allow family Sipps, so you could have relatives in the same pension scheme and they could inherit your pension benefits.”
However, Revenue & Customs is concerned that people may use pension contributions as a means of tax avoidance. “Much depends on intent,” Mr Cuthbert says. “If you have made contributions to avoid tax, then it is likely that IHT will be payable.”
It also depends on how you take your pension benefits.
Mr Moret says that if an individual has already started to draw benefits from an annuity, he or she is unlikely to face a tax charge. But if you opt for income drawdown, there may be grounds for an IHT charge, particularly if you take the minimum income or, from next April, no income at all, in which case it could be argued that this constitutes a capital preservation scheme.
Finally, if at age 75 you opt for the new Alternatively Secured Pension, which allows you to avoid purchasing an annuity, it is likely that any death benefit will incur IHT.
I own a buy-to-let property, which I would like to hold within a pension fund after A-Day. Will it be possible to transfer a property I already own into a Sipp?
Yes, it will. “In-specie” transfers — transfers of assets, rather than cash — will be allowed after A-Day, which means that you will be able to transfer property, equities or any other allowable assets into your Sipp.
Unfortunately, Mr Moret says, “the transfer will be regarded as a disposal”. This means that you will have to pay stamp duty on the property as if you were buying it with your pension fund.
Interestingly, you will be able to transfer a property in lieu of pension contributions, so long as you have sufficient earnings and the property value falls below the annual contribution limit of £215,000. If you do not have sufficient earnings, you may be able to transfer a part of the property into your fund.
“There does not appear to be any objection to joint ownership of a property, with you owning part and your pension fund owning the other part,” Mr Moret says. However, he adds that, in practice, it will depend on whether your Sipp administrator is happy with the arrangement.
It is not just property that can be paid into your Sipp in the form of a contribution.
Mr Cuthbert points out that people who own businesses will be able to make in-specie transfers of share capital in their companies.
I am a member of my employer’s occupational pension scheme but am considering a change of career within the next 12 months. Does A-Day affect those leaving company pension plans?
It does if you are more than a year from retirement and have less than two years’ service with the company.
Under present rules, an employer does not have to offer a transfer or a refund to any employee who leaves with less than two years’ service. Instead, it can claw back the contributions made on the employee’s behalf.
After A-Day, companies will have to offer employees transfer values or a deferred pension, provided that they have worked for the company for more than three months.
This may be good news for a small number of employees, but pensions experts say that it is bad news for the majority. Research by Killik & Co indicates that the abolition of clawback could cost occupational schemes £430 million and could even force some company schemes to close.
Beginer's guide
A-Day (April 6 next year) is the date on which new pensions legislation comes into force. The existing eight sets of rules will be scrapped in favour of one regime to cover every type of pension plan. The Government is to publish its regulations next month.
For detailed government information about the pensions changes go to the Revenue & Customs website at www.hmrc. gov.uk/pensionschemes/pts.htm and the Department for Work and Pensions site at www.dwp.gov.uk/ lifeevent/penret/penreform/
For more on pensions visit www.timesonline.co.uk/pensions
