New legislation being brought in on 6th April that revolutionises what can be done with your pension. No longer will you be restricted to buying an annuity -
Sam Dunn asks if new incentives to encourage us to save more will head off Britain's looming pension crisis
Any light that pierces the gloom enveloping the distant horizon of our pension provision is desperately needed.…But soon we should be able to see more clearly. The first shaft of light should penetrate the clouds in the autumn when Adair Turner, chairman of the Pensions Commission, reports back with recommendations likely to include higher taxes, a later retirement age or more generous savings incentives.
The second is A-Day, 6 April 2006 - the date of a radical revamp of pension rules…From 6 April next year, … savers opting for a self-invested personal pension (Sipp) will be able to use it to invest in residential property - whether a buy-to-let, a holiday home or even their own house.
In the latter case, details have yet to be finalised, but Tom McPhail, pensions specialist at independent financial adviser Hargreaves Lansdown, says it might work like this.
An individual with a sizeable pension pot (say, £400,000), but who plans to work for another 10 years, cashes it in to buy a house. He then pays rent to live there and the money feeds back into his very own Sipp scheme, increasing the value of it tax-free for as long as he's resident. When he's ready to retire, the property can be sold for cash that in turn buys a smaller home and an annuity.… It is anticipated that properties inside the fund will be free of tax on rental income and capital gains and would also be immune from inheritance tax after 75 as they remain part of the pension fund, making this a very appealing option indeed.
Additionally the amount available to borrow to purchase for this purpose will be up to 50% of the fund.
John Howell, senior partner at solicitors John Howell and Co, cautioned: "If SIPPs investment is done properly then it has great potential. The tax breaks are fantastic and it is a huge opportunity to use existing funds to buy residential and overseas property.”
Additional changes in the legislation mean that anyone will be able to make contributions to a UK pension scheme, regardless of where or for how long they are resident. This means that UK expats … will be able to continue to contribute to their UK pensions.
Company directors and business owners can also benefit from the changes, Under current rules business owners who have not used up their pension allowance in previous tax years can make extra contributions to an executive pension plan (EPP).
Suppose you started a company in 1986, but haven't made any contributions. By setting up an EPP now you can claim years of service right back to 1986. This entitles you to generous levels of tax-free cash, provided the contributions are made before A-Day.
Current rules allow the whole value of an EPP to be paid tax-free as long as the value of the fund is less than three-tenths of final pay, multiplied by the number of years worked.
So if you have 20 years of service and earn £100,000 in the year before retirement, you can take £75,000 tax-free.
Adrian Boulding of Legal & General, said: “Provided this amount of contribution has been made to an EPP before A-Day, the tax-free cash entitlement can be preserved under the new regime.
“For many business owners this is too good an opportunity to pass up.”
Laura
Sources:
A-Day Reform to UK Pensions Allows Investment in Residential Property: The Independent Online Edition, 1st May 2005;
www.taxationweb.co.uk; www.myfinances.co.uk; Get Ready For Pensions A-Day: Times Online, 22nd May 2005
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