Personal Pension Schemes

Personal Pension Schemes
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There is a growing interest in using self-invested personal pensions (SIPPs) even if direct property investment is not required. A SIPP is where the pensions legal status and administration are separated from the investment. So, unlike a traditional insurance company plan, where the whole plan is packaged together, you pay a fixed fee for the set-up, tax relief and administration and then choose the investments separately either by yourself or with the help of an adviser. The range of options before 6 April 2006 included collective investments, for example unit trusts, investment trusts and OEICs, shares listed on recognised stock markets, fixed interest securities, bank deposits, commercial property and land, futures and options, and traded endowments. Since April 2006, unlisted shares are admissible, as are real estate investment trusts (REITs).

Many changes to pensions legislation came into effect on 6 April 2006, although whether they fall into the category of simplification is debatable. The ability to pay personal contributions up to 100% of the salary (capped at an annual limit, initially £215,000) is a generous increase for many. Employer contributions are also allowed, again up to an annual limit which does not apply in the year of taking benefits, although tax relief on employer contributions may be withheld if they are deemed excessive. There is also a lifetime limit on benefits set initially at £1.5million, although existing funds in excess of the limit can be protected.

Funds in excess of the limit are taxed at 55%, which at first sight seems high but may not be so, since funds grow in a tax-efficient environment and can be paid direct from an employer, thereby avoiding tax and national insurance. The tax savings on direct employer contributions can add up to just over 50% so that the only fund that has to save in excess of another few percent to break even. Therefore, it may be that even someone who is likely to exceed the lifetime limit would still be better off opting for further pension contributions if they have around 10 years or more outstanding before retirement.

Final salary based schemes are assessed differently by creating a notional fund of 20 times the pension, although the actual cost of such a pension is much higher. Therefore, for certain executives and company owners, we expect to see the creation of a small one-man final salary type scheme to exploit these anomalies. For holding small companies shares (that is those that are not quoted on main stock exchanges), so long as they remain available, venture capital trusts or enterprise investment schemes are highly tax efficient. In any case, holding unquoted shares directly does not give inheritance tax exemption after two years and capital gains tax reductions over holding such funds by collective investment.

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