In April 2015 pension legislation was significantly changed, giving individuals access to their money-purchase arrangements, allowing for the complete withdrawal of funds.
This has generated significant amounts of media coverage, and interest from many clients who wish to reappraise their pension strategies and reconsider how these assets are utilised to provide the most effective strategy, writes Steph Gordon, Employee Benefit Consultant at Mattioli Woods.
Pension freedom is an attractive prospect for many, but perhaps the main value in pension assets following the rule changes is retention of these assets, as they provide a flexible tax-free savings vehicle with a significant inheritance tax saving to benefit the wider family.
Therefore, it is perhaps appropriate to take a step back and consider other ways in which pension assets can be ‘accessed’, and retain these longer-term benefits.
Small self-administered schemes (SSAS) and self-invested personal pensions (SIPP) have always had the ability to hold a range of assets, not just unitised investment funds and cash deposits.
It has been possible for such schemes to invest in land or commercial property, and even buy the unquoted shares of a trading business. All of these transactions have a range of considerations, but in light of the pension changes, it is essential that clients are given the most effective and efficient planning advice to meet their needs, and they consider their position in a holistic manner.
I have set out below two scenarios based upon ‘real life’ events where taking an alternative approach to simply withdrawing pension assets provided a better outcome:
Victor was in his early 60s, running a trading business. He held two insured moneypurchase pension arrangements and, with the change in legislation, was considering withdrawing these pots in order to provide a capital sum to help with the funding of other projects.
Victor had never put a great deal of consideration into his pension arrangements, although the pots had grown to a sizeable sum through contributing over a number of years.
Victor owned a property from where his business traded, which in addition had an adjoining piece of land for which he was keen to obtain residential planning permission for future development.
Victor’s main consideration at this point was how the development could be funded, given his resources. His first consideration was to withdraw his pension funds in full in order to provide a cash pot to part fund this process. The downside to this approach was the significant level of tax that would need to be paid in withdrawing the pension fund monies, which above the tax-free lump sum would be taxed as income based upon Victor’s marginal rate, with much falling at 40 per cent and 45 per cent income tax.
Having been invited to a meeting by Victor’s accountant we set out an alternative approach to Victor. The adjoining plot of land that Victor owned personally was held under a separate title from that of the property from which the business traded. This had recently been valued and its value was less than the overall value of Victor’s pension fund.
Victor was entitled to his pension commencement lump sum (25 per cent of his pension savings completely free of tax). Having undertaken detailed reviews of his existing pension arrangements, noting there were no penalties if they were transferred, Mattioli Woods established a SIPP on behalf of Victor and then transferred his existing arrangements to the SIPP.
Victor’s land asset was purchased by the SIPP and, in exchange, Victor received the cash value of the land. As the transaction was valued below £150,000, no stamp duty was payable, albeit there was a small element of capital gains tax to be accounted for.
The SIPP successfully obtained planning permission, which revalued the land asset (a tax-free gain within the pension scheme, as no capital gains tax is payable), doubling the value of his pension assets.
Victor withdrew his tax-free pension commencement lump sum (enhanced by the increase in asset value), which left a small balance of cash within the pension scheme.
Victor has now received the equivalent of 90 per cent of his pension assets by way of a cash payment, the pension scheme owns the parcel of land benefiting from residential planning permission, and Victor has received a tax-free pension commencement lump sum equivalent to twice the value of his original entitlement.
Victor now has the funds to consider development of the land, or alternatively the sale to a prospective developer, and has enhanced his overall value tax-efficiently whilst protecting assets for the next generation.
Vanessa has a successful trading company. The change in pension legislation had highlighted to Vanessa that perhaps pension planning was worthy of further consideration, having never really been keen ‘tying her money up for the longer term’.
The successful trading business was cash generative, but Vanessa was not in a position to be able to afford both pension contributions and her existing level of income from the business in order to maintain her lifestyle.
Although, at face value, the new pension legislation perhaps allows one to purchase a Lamborghini(!), the problem for ‘new’ pension investors is, when flexi-access drawdown is effected (the means by which you drawdown the whole pension fund), any future pension contributions are restricted to a maximum of £10,000 per annum, significantly restricting the strategy of tax-efficient contributions and subsequent drawdown of funds.
Having met with Vanessa and reviewed her current position in detail, it was established that she had an old insured pension arrangement, albeit with very little value. This allowed her to consider using carry forward contribution relief in order to make higher contributions than the standard £40,000 per annum by making good ‘missed years of contributions’. We also identified Vanessa’s trading business would potentially be a suitable asset for the pension scheme to invest in.
Therefore, we formulated a strategy whereby Vanessa’s trading company could make pension contributions to a SIPP, benefiting from corporation tax relief. The pension scheme could, in principle, invest these funds into Vanessa’s trading company.
This would provide the SIPP with partial ownership of the trading company, and would release the cash value of the shares to Vanessa. In this way, Vanessa created a tax-efficient pension pot for her longer-term benefit, whilst continuing to receive an income stream via the share transaction.
Vanessa was delighted.
This is a specialised area of planning and we conducted, in conjunction with the business’s auditors, a detailed review of the company’s asset list (to ensure there were no assets held which would cause an issue for the pension scheme), and also undertook an open market valuation of the company.
As with any disposal of assets, capital gains tax was considered by the client’s accountant, and stamp duty at 0.5 per cent was payable on the acquisition of shares by the pension scheme. The plan is to conduct this transaction again next tax year and it will be necessary to review the shares (as highlighted above) once again, as this will form the basis of a new transaction.
There are more options to consider for how a client can access their pension assets without resorting to withdrawing the benefits and potentially paying significant amounts of income tax.
If you are considering how best to access your pension benefits, the first step is to undertake a detailed review of all the options and we are happy to help.
As illustrated by the two client scenarios, there are a number of ways in which individuals can access their pension arrangements, given the right circumstances.
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