The pensions landscape is changing irrevocably. And I have just witnessed the
first trickle in what might become a torrent of queries that will engulf those
charged with running employee benefit arrangements.
I took a call from a financial director, informing me that he had just
purchased a property in Cyprus, which he wants to put in his pension plan. Great
for him, but what about the wider implications of the new pension rules on the
provision of employee benefits?
From 6 April 2006, changes to the rules governing pensions will create
opportunities, but they may also create some problems. Most of the changes
should make life much simpler as the rules will apply to all pension schemes,
rather than differently according to the type of scheme and the date of joining.
Transitional rules are being introduced that aim to ensure members will
retain the same benefits as they enjoyed under the old rules. These are complex
and do not always fulfill this end, but are still welcome.
One change is in the range of investments that will be permitted within
pension arrangements. From A-Day, all pension schemes will be able to invest in
residential property, including main residences, both in the UK and overseas, as
well as purchasing personal chattels such as fine wine, yachts, vintage cars and
jewellery. It will even be possible for a pension arrangement to borrow up to
50% of its value to help fund these purchases.
For the financially aware, particularly those with significant pension funds
already, this could enable even greater diversification of pension investments
and the potential for investment growth. Purchasing a holiday home with the
money you have sitting in your pension scheme is an attractive idea.
But there are problems with such investments, for example, the illiquidity of
the asset, buying and selling costs, and maintenance fees. And that’s not
forgetting the potential tax implications of a holiday in such a property.
Regardless of these difficulties, just imagine the number of enquiries scheme
administrators could receive about sheltering a main residence in the pension
scheme. FDs are likely to end up with many of these enquiries, even when the
company has its own pension department or a capable human resources department.
Of course, it is unlikely that trustees of occupational pension schemes will
wish to alter the investment principles to allow members access to such
investments. Indeed, their primary responsibility is to all the beneficiaries of
the pension scheme, not just the whims of certain scheme members.
But many members will want to link their largest tangible asset with their
largest intangible one. This may be helpful if it means members take more
interest in their plans.
For those companies making contributions to group personal pension plans
(GPPs), there will be even less defence against the rising tide. Self invested
personal pensions (SIPPs) already allow members greater freedom to direct the
investment of their funds.
The market is likely to see many SIPP providers adopting the new rules and
allowing residential property investment. This will almost certainly lead to the
emergence of corporate SIPPs (CSIPPs). What reasons will be given for retaining
the GPP instead of introducing a CSIPP? Time and effort must be spent in
answering these queries, or engaging advisers to investigate the possibilities.
As is often the case with pension provision, communication is key. Explaining
the changes that are coming, the opportunities that exist and the likely way in
which the company will deal with the situation will help to stem the flow of
Those companies with small self-administered schemes (SSAS) would be forgiven
for thinking that the new SIPP provisions will finally see these useful
arrangements sailing off into the sunset. It is true that many of the changes
equalise the offering from the two arrangements after A-Day. There are some
last-minute funding opportunities with SSASs but even after A-Day there is merit
in continuing these schemes.
It looks increasingly likely that SSASs will offer the best possible solution
for family owned and run small-to-medium sized companies that want to transfer
assets through the generations. While HM Revenue & Customs has said it
intends imposing inheritance tax on reallocated pension funds, it is difficult
to see how it can tax reallocations of non-earmarked funds under a SSAS.
SIPP funds are always earmarked, as providers do not allow common funds.
This isn’t the case with SSAS since the trustees control the fund and assets
cannot be earmarked. As a result, assets held in a SSAS can be allocated to the
members in whatever proportions the trustees deem fit at any time without, it
seems, any inheritance tax consequences.
The SSAS ‘wrapper’ can therefore hold assets used by a business (e.g. a
commercial property). As members come and go, assets can be reallocated ad
infinitum. It is hard to envisage how such reallocations before age 75 can
create an inheritance tax problem.
Some of the changes may lead to exciting opportunities. Post A-Day, all
pension arrangements will be allowed to invest in unlisted stocks, but the limit
on investing in the principal employer will be reduced to 5% of the scheme’s
assets. Despite this, schemes will be able to invest in three further associated
companies, bringing the maximum percentage of scheme assets that can be invested
in group companies to 20%.
By a quirk of the legislation it appears that SIPPs will be able to invest
freely in unlisted shares, even those of connected companies, without limit.
Perhaps this is a further way for employees to be able to invest in the success
of the companies for which they work.
So to that FD, I would say that the outlook is mixed but with some proper
planning he could be ready for anything. But he should make the most of the
sunshine before April.
Ian Luck is a director at Smith & Williamson Pension Consultancy
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