Securing Your Financial Future: Pension Planning
For many people, pensions have fallen off the radar over recent years – seen as a "complex" with the rules constantly being changed by successive Chancellors (and even the odd raid on them in the past!)
In this article we consider how, if used properly with a bit of creative thinking, they can be a fantastic tool and should very much be something to consider when looking at your wealth management and retirement planning.
Most people can contribute up to £40,000 per annum into a pension plan as well as use up any “headroom” from the previous 3 tax years. For very high earners this annual allowance is scaled down (roughly with income above £240,000 in the current tax year)
There is a lifetime allowance of just over £1m, so care is needed if pension pots are getting anywhere near this amount. If you believe this is the case, talk to us about what you need to be aware of in such a situation.
Pension plans have a number of tax advantages:
- The contributions attract tax relief
- An allowable deduction for your employer if the company is making contributions, or
- Tax relief against income for individual contributions
- Income and capital gains released from assets in which the pension scheme invests in are tax-free
- The value of the pension pot is outside of your estate for Inheritance Tax (IHT) purposes
- If you die before age 75, your nominated beneficiaries can inherit your pension pot tax-free
- When you take benefits from the pension plan, 25% of the value as a lump sum is tax-free
Against these tax advantages, the cons are:
- Investments within pension plans are restricted – you can’t, for example, invest directly in residential property (although commercial property investment is allowed)
- The money is ring-fenced and can’t be accessed until age 55.
Pension Planning Opportunities for the property minded
Many people have or are planning to build some sort of property portfolio as a way of building funds for their retirement
So, let’s look at some ideas that could combine their love of property with the tax advantages of a pension fund, to make pension planning more attractive.
Taking control of the investments
By using a Self-Invested Personal Pension Plan (SIPPs for individuals) or Small Self-Administered Schemes (SSASs for companies), you can take more control over the investments that sit within your pension plan.
This could be particularly attractive for those wanting to invest in commercial property. Let’s look at a couple of examples: -
Let's say 'Example Ltd' are a successful company and has surplus cash available within the business. The opportunity arises to purchase the premises the company is currently renting. The 3 directors would like to purchase the property. They have made minimal pension contributions over the years to various personal pension plans and nothing in the previous 3 tax years. They talk to their advisers and set up an SSAS. By using unused relief from previous years, they maximise the contributions they can make into the scheme - £160,000 each (£40,000 for the past 3 tax tears plus the current tax year) – giving them total contributions into the scheme of £480,000. The SSAS can borrow up to a maximum of 50% of this value to further increase funds to purchase the property. The SSAS borrows a further £120,000 and acquires the property at a price including costs of £600,000.
The company pays market rent to the SSAS which enables the borrowings to be repaid. The rental expense in the company is an allowable expense. The rental income in the SSAS is exempt from tax. The company obtains tax relief on the contributions to the SSAS of £480,000.
Any capital gain on the property within the SSAS is also tax-exempt.
Mr. B has the opportunity to purchase a commercial property for £250,000. He has built up some pension value in the past but is not really sure of what he has. On talking to his advisers, it turns out he has various past personal pension plans that total £150,000. With his advisers, he sets up a SIPP and transfers the various pension pots built up into the SIPP. He adds (via his personal company) a further £50,000 of pension contributions making use of any unused relief he has, bringing the SIPP investment to £200,000. The SIPP borrow 50% of its value (£100,000) and acquires the property.
Rents on the property are paid into the SIPP and are used to repay the mortgage.
Some years later, the commercial property gets planning permission for conversion to residential. At this point, the SIPP sells the property at fair market value with the planning permission of Mr. B’s own property company.
As you can see from the above, some creative pension planning can make for some very interesting and tax-efficient situations.
It is obviously important to take tailored advice specific to your individual circumstances and If the above is of any interest or you would like to discuss the matter in further detail, please contact me at email@example.com.
Alternatively, if you have any further questions, please don't hesitate to get in touch with us today.