A SIPP in the sun (Self Invested Personal Pension) by Tim McHugo

The background
The catch-22 for all governments worldwide is how to reconcile the financial needs of an ever increasing population with the productive output/tax revenues produced by a declining workforce. In other words how does it provide for people in their old age. The usual answer (often easier said than done) is for everyone to be encouraged to save more for their retirement. Over recent years this approach has not been working. Most pension funds have fallen in value over recent years in line with stock markets. There is also a general trend towards much more short term thinking by many younger people, evidenced by the vast amount of personal borrowing in the UK to meet our more immediate needs and pleasures. Furthermore pensions are also often perceived as overly complex. The combination of these and other factors mean that as a nation we are not saving enough for our old age.

To encourage a greater level of long term pension saving, the Government is seeking to simplify the pension rules from April 2006. The changes promise to be revolutionary and in some respects do seem to make pension saving much more attractive.

So what are the proposed changes to be introduced on 6th April 2006?
A new set of rules are being introduced that will apply to all pension plans.
These include:

• Employees will receive tax relief on contributions of up to 100% of their salary. Employers can pay up to £215,000 for each employee with tax relief.
  
  
• For every individual there will be a maximum allowable fund (lifetime allowance) of £1.5m. Any excess funds will be taxed when benefits are taken.
  
  
• From 2010, the minimum retirement age will rise to 55.
  
  
• 25% of the pension fund can be paid on retirement as tax-free cash.
  
  
• The exciting one – pension investments will be extended to all types of residential property, including holiday homes, works of art and classic cars.
  

So can I buy my villa abroad through my SIPP?
The simple answer is yes. What is more the property will benefit from the generous tax breaks afforded to pension funds. Under current proposals, from 6th April 2006, all residential property including holiday homes can be purchased through a SIPP, subject to the following conditions:-

• Anyone using the property (including you) must pay a commercial rent.
  
  
• All rental income will be received gross into your pension fund.
  
  
• All capital growth is gross – therefore no CGT on sale.
  
  
• Once you retire you do not have to sell the pension asset but can merely draw a pension from the rental income.
  
  
• At 75, you may chose to sell the property and take 25% of the sale proceeds as tax-free cash and purchase an annuity with the balance of the pension fund.
  
  
• In certain circumstances, pension funds may even be transferred on death after the age of 75 to associated schemes owned by the members' family.

So what if I am interested in buying a property but my pension fund is short
of funds?!?
First of all, under the new rules it is possible to make much larger contributions with tax relief at your highest rate. Thus you could make additional contributions to boost the value of your fund.

If this is not possible, from 6th April 2006 you can take out a mortgage for 50% of
the value of the pension fund that you have already built up. So if you have a pension fund valued at £100,000 you could borrow a further £50,000 – meaning you could afford a property valued at £150,000. (Under current rules SIPPS can borrow up to 75% of the value but only for the purchase of commercial property).

Finally, if your own pension fund is not sufficiently large you could pool your funds with others and buy a property on a joint basis. So if you and a friend/colleague/spouse have £100,000 between you, you could borrow the same and buy a property valued up to £200,000. Care needs to be taken to obtain appropriate professional advice to cover such aspects as property ownership and the ability of fund members to sell and realise their investment.

So are there any restrictions on my use of the property?
If you use the pension property you will have to pay the market rent, but you will be paying money directly into your own pension fund. At least, you won't be paying a rent to the local hotelier! If no rent is paid, you will be liable for a tax charge as a benefit in kind.

So, on your next holiday when you are basking in the sun, don't just hold those ‘what-if’ thoughts – go on, make it happen!