Get creative with pension planning
These days, conventional retirement planning tends to involve either accumulating funds in a personal pension on a wrap platform of the advisers choice or, where the size of the pension pot warrants it, using a low cost Self-Invested Personal Pension (SIPP) with a discretionary fund manager.
For corporate clients, group personal pensions are set to be replaced by the age of the corporate wrap, which sees a new dawn approaching as a result of auto-enrolment.
These conventional approaches make perfect sense for the majority of individuals, but there are options to be creative with retirement planning.
Now that contracting-out of money purchase pension schemes has been abolished, protected rights plans can be consolidated with other pension pots and used for phased retirement in tandem with self-investment plans.
Pension input periods
For those clients lucky enough to have earned a large bonus or generated cash reserves in their businesses, contributions of up to £250,000 can be paid in one year. This involves combining carry-forward and pension input period manipulation. Payment of large contributions by an employer is more tax efficient than personal contributions as NI is avoided as there is no specific link between contribution and salary level, producing a useful planning angle.
Commercial property has long been a popular option for business owners. A SIPP or Small Self Administered Scheme (SSAS) can be used to buy trading premises. Here are some advantages:
• Buying the property with the pension fund releases cash back to the company;
• Rent can be paid to the business owners’ own pension scheme rather than an external landlord;
• The property is protected from creditors should the business fail;
• The company can make an in-specie contribution of property and benefit from corporation tax relief;
• The pension scheme can borrow up to half its fund value to purchase a larger premises;
• A joint purchase can be made with the pension scheme member, the business or other parties;
• The pension scheme can opt to tax the property for VAT and reclaim VAT paid on purchase.
SIPPs and SSAS can buy unquoted shares. A SSAS can spend up to 20% of its fund value on shares in up to four sponsoring companies.
Alternatively, SIPPs and SSAS can buy up to 19% of an unconnected company which can also help the funding of interesting investment opportunities.
A SSAS can lend up to half its fund value to sponsoring employers. Loans must be secured by a first legal charge on any permitted investment.
This is an excellent way to obtain borrowing without paying interest to a bank. Both SIPP and SSAS can make loans to totally unconnected parties. Although high risk, it is a creative way to fund businesses.
Conversions & assignments
Executive pension policies (EPP) invested in zombie insured funds are often seen as untouchable due to protected tax-free cash restrictions. However, it is possible to convert a standalone trust EPP into a SSAS by changing its rules. These funds can then be encashed, transferred into the SSAS bank account and reinvested elsewhere. This can also be done by assigning an insured policy to a SSAS, unlocking funds, which can then be used as part of a more creative investment strategy.
Pooling with others
Pooled pension “pots” work well with SIPP and SSAS, not only for property and loans but also for family strategies using family pension trusts and SSAS.
Pensioners have been hit by the reduced maximum income drawdown to 100% of GAD and historically low gilt yields. Here are three ways to increase income:
• Flexible drawdown – for large pension funds with enough cash to purchase an annuity for £20,000 p.a.;
• Variable lifetime annuities still allow a maximum pension of 120% of an equivalent annuity;
• SIPPs and SSAS property owning members can receive a management fee, typically 10% of gross rental yield.
Family pension plans, where an employer pays pension contributions for an employee’s family members will be legislated-out in the Finance Bill 2013, so opening a window of opportunity. Third party pension contributions (e.g. a grandparent paying contributions for a grandchild) will not be affected, so pension recycling will continue.
The over-55s may draw a pension and use some or all of that income to pay pension contributions for others. This creates a tax-neutral situation where tax on pension income is balanced out by tax relief on pension contributions.
So, there is a whole host of additional creative retirement planning opportunities. Pensions should not be viewed as a tiresome imposition but as a living, breathing investment strategy that goes on a journey with the individual throughout their working life and beyond.