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How you can help clients make the most of A-Day

14th Oct 2005
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By Nick Braun PhD

It's arguably the most important development in the world of property investment since the invention of the buy-to-let mortgage.

From 6 April 2006 (also known as A-Day) your clients will be able to put residential property into a self-invested personal pension (SIPP). Along with other important pension tax changes, this means they will be able to:

  • buy property at a 40% discount
  • never pay capital gains tax on their property profits again; and,
  • potentially cut the income tax on their entire salaries and business profits to zero.

    While A-Day heralds an exciting new age for pension investors, there are also some ominous clouds on the horizon.

    Wealth warning
    In particular, your clients will be more vulnerable than ever to aggressive and unethical investment promoters, as it's becoming increasingly clear that a significant portion of the property investment industry is looking to make a quick buck out of the SIPPs revolution.

    For example, a lot of investors are going to be encouraged to transfer savings accumulated in old occupational schemes into their SIPPs, even though this may result in the loss of important benefits and the payment of penalties and charges. In many cases pension transfers are worthwhile... but not always.

    Other investors will ignore all conventional wisdom regarding risk management and put all their pension savings into just one or two investment properties.

    Finally, many will be tempted to invest their retirement savings in dicey emerging markets which have volatile currencies and no tradition of protecting property rights.

    The accountancy profession is probably better placed than any other to offer unbiased advice and protect investors from all the hype.

    Common myths
    With the Wealth Warning out of the way let's take a brief look at the most important of the A-day changes. In particular, l would like to focus on some of the common myths doing the rounds:

    Myth #1 - A-Day introduces new tax breaks
    There is only one reason why your clients should put their money into a SIPP rather than anywhere else: to save tax. But despite what many think, the A-Day changes do not introduce any new tax breaks! The pension tax reliefs have been around for years and come in two flavours:

  • Tax relief on your contributions - what I call buying property or other assets at a 40% discount. It takes the shape of basic-rate tax relief paid into your pension pot by the taxman and higher-rate tax relief claimed through your tax return.

  • Tax-free investment growth ' all your rentals, dividends, interest and capital gains are tax free.

    In some instances, thanks to these two tax reliefs, it will be possible to earn nearly double the amount that someone investing outside a pension plan can earn.

    Myth #2 - It's all about property
    The fact that residential property will be allowed into pensions for the first time has captured most of the media coverage. However, some of the other A-Day changes are just as exciting:

  • Contribution Limits: At present you can only make contributions within certain prescribed limits, based primarily on your age. For example, if you're under 35 years of age you can contribute 17.5% of your earnings, rising to 40% if you are over 60 years of age.

    From A-Day these contribution limits will be done away with and replaced by a much simpler and much more generous rule. From that day you will be able to invest the lower of: your entire annual earnings; or £215,000.

    This change will make pension plans one of the most powerful tax shelters ever seen and usher in a whole new era of 'bonus tax planning'.

  • Multiple pension plans: At present it's not possible for those who belong to their employers' pension schemes to make personal pension contributions as well. There are a couple of exceptions but they're not worth mentioning here.

    This means most salary earners cannot currently contribute to a SIPP.

    From 6 April 2006 all this will change and your clients will be able to belong to both their employer's pension fund and invest in a SIPP. This way they can enjoy the best of both worlds, namely a cushy company pension scheme and a private pension that invests in their favourite types of asset.

  • Flexible pension income: One of the reasons the current pension regime is so disliked is because, when you retire, you are eventually forced to buy an annuity.

    From April 2006 there will be much more flexibility. You will be able to keep your pension invested and withdraw income as and when you please, subject to certain restrictions.

    Myth #3 - The new borrowing restrictions are a problem
    At present if your client has £25,000 in a SIPP a further £75,000 can be borrowed to buy property (commercial property at present). After A-Day only £12,500 can be borrowed ' 50% of the net pension assets.

    Is this a major problem? Not necessarily.

    There are two reasons why property investors borrow money:

  • To use the 'magic of gearing' to boost their returns. The investor borrows money so that he can benefit from capital growth on a much bigger chunk of property than he could normally afford. The rental income is used to pay the interest on the borrowings. Even rich investors gear up their property portfolios.
  • Because very few can afford to buy an entire property outright.

    Gearing is most useful when property prices are rising strongly. At present prices in the UK are, at best, drifting sideways. In these circumstances investors are arguably better off holding onto their rental income (especially when it's tax free inside a SIPP), rather than using it to pay off borrowings.

    Although affordability could be a serious issue After a-Day, the property investment industry is evolving rapidly. Experts such as Tailormade for Accountants (www. are currently devising pooled arrangements for SIPP investors which allow your clients to invest smaller chunks of money.

    Furthermore, the introduction of real estate investment trusts and other investment funds will probably allow pension savers to own part of a big portfolio of commercial and residential properties for a very small outlay.

    Finally, you can be sure that clever investment advisers will come up with special products to get around the borrowing restrictions, for example by putting highly geared property investments into alternative legal structures and getting investors to put these indirect property investments into their SIPPs.

    Myth #4 - Annuities are dead
    At present when you retire you eventually have to take most of your pension benefits in the form of a fully taxed annuity. From A-Day you can still buy an annuity but you won't be forced to ' instead you can keep your money invested in property or other assets and withdraw the income.

    Annuities have always been disliked by people outside the insurance industry because when you die so too does your pension. However, there is a misconception that if you die early your surplus annuity capital goes into the life insurance company's coffers.

    This is actually not the case. The money is used to pay the pensions of those who live longer and who end up getting significantly more income than they originally paid in. In this way annuities protect you against the greatest risk of all: how long you live.

    Annuities have a lot going for them. They're extremely low-risk investments and each payment consists of interest income and some of your original capital. As a result the income is often far higher than income from other investments. For this reason they are very useful for people with inadequate retirement savings ' the majority of the population in other words.

    Myth #5 - SIPPs are the best place for commercial property investments
    At present many business owners are buying commercial premises through their SIPPs before the borrowing restrictions come into force on A-Day. In many ways this is a dream tax break: The rent paid by your company to your SIPP is tax deductible and the SIPP pays no tax on this income. And one day when the property is sold there will be no capital gains tax.

    Although this is an attractive tax planning opportunity, commercial property is not necessarily the best type of property to put into a pension. Because many commercial property investors qualify for business asset taper relief the maximum capital gains tax rate is just 10%. In other words, putting this type of property into a SIPP will not save them a lot of tax.

    And what about income tax? Rental profits are tax free inside a SIPP but many property investors don't earn much profit because their rents are all eaten up by mortgage interest.

    From A-Day investors will have to think very carefully about what type of property they put into their SIPPs.

    Myth #6 - A-Day is just about pensions
    It's a little known fact that 6 April 2006 is also A-Day for ISA investors ' from that date it will be possible to invest in property unit trusts and shelter your income and capital gains from tax. ISAs don't offer upfront income tax relief but they do let you withdraw income tax free ' something pension investors cannot do.

    The most attractive feature of ISAs is their enormous flexibility: your investment returns are completely tax free whether you invest for one month or one decade and you can withdraw income tax free at any time.

    Myth #7 - Big pension contributions always get big tax relief
    One of the most attractive of the A-Day changes is the increase in the contribution limit to 100% of earnings up to £215,000. This means investors with large bonuses and other windfalls will be able to make occasional big SIPP investments to reduce their income tax bills.

    However, just because you have a big lump sum doesn't mean that you should invest it in one go. If you have £50,000 to invest but only pay higher-rate tax on £20,000 of your earnings, you may want to spread your investment over several years so that you get the maximum income tax relief.

    Myth #8 - SIPPs are completely flexible
    The new pension rules are extremely flexible and allow you to invest in almost anything including wine, antiques, and fine art. They will also let you invest in almost any type of property.

    However, very few investors realize that the people at the coal face ' the SIPP providers ' are quite picky about the types of property they allow. The pension trustees will be the legal owners of the property and the landlord, not you. They take this duty seriously and may not want to take on the responsibility of a one-bedroom flat in Baghdad.

    Only after A-Day will we really know what type of property can be put into a SIPP.

    Myth #9 - Investors can put their existing properties into a SIPP
    From A-Day you can put your existing property portfolio into a SIPP and many investors I speak to have thought about doing this.

    However, most don't realise that they will have to 'sell' their properties to their SIPPs and may end up with large capital gains tax bills.

    In most cases it will be impossible to do because very few investors will have sufficient funds inside their SIPPs to buy the properties.

    Others are thinking of selling their properties and putting the cash into a SIPP. However, very few remember that you have to have sufficient earnings to do this. If you have a £250,000 property and a £50,000 salary it will take you at least five years to get the money into a SIPP and most of it will only qualify for basic-rate tax relief.

    Myth #10 - SIPPs are for everyone
    A lot of property investors I speak to want to put a lot of their wealth into a self-invested pension after A-Day.

    Most are lured by the big potential tax savings. However, very few stop to think about the potential drawbacks.

    In particular very few remember that once you pay your money there's no chance of a refund. You will not be able to access any of your savings until you reach the minimum retirement age.

    At present if you have a SIPP you can start withdrawing benefits from age 50 but from 2010 this age limit will rise to 55.

    What this means is that, no matter what financial storms blow across your decks between now and the day you reach the minimum age, your pension savings will not be there to bail you out.

    Investing in a SIPP is a great idea but putting a large proportion of you wealth into one is probably not, especially if you are many years from retirement.

    Action Plan
    There is likely to be a huge demand from clients for unbiased advice and there's lots you can do to help them:

  • Find out as much as possible about all the A-Day changes.
  • Find out as much as you can about SIPPs. A good source of information is the SIPP provider websites, including Suffolk Life, James Hay, Pointon York, Talbot and Muir

  • Find out as much as possible about property investment, investment mortgages and property syndicates. A good source of information is Tailormade for Accountants

  • Find out which clients need to act now to protect their existing rights. A-Day will see the introduction of a lifetime cap on pension savings. Wealthy clients can protect their existing rights by taking appropriate action.

  • Find out which clients may be interesed in commercial property investment, in particular buying company premises and may need to act now to secure borrowings under the current more generous regime.

  • Find out which clients have pension savings in old occupational schemes and may benefit from transferring this money to a SIPP. Independent advice from a pensions adviser will probably be required.

    Nick Braun is the author of the book 'Retire Rich with a Property Pension' available from

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    Replies (6)

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    By andymeeson
    17th Oct 2005 11:22

    Some answers
    @ David Cane:
    All employer contributions need to satisfy the "wholly and exclusively" test. However, HMRC have indicated that they will not seek to disallow pension contributions in circumstances where an equivalent bonus would attract CT relief.

    @ Kevin McGuckien:
    The usual place to draw the line as an accountant is product recommendation. It's fine to tell clients how much they can stash into a pension and how much tax it might save them; without FSA regulation it would be risky to go further.

    @ Nick Farrow:
    Unlikely. Even at a 32.75% marginal rate, the sheer tax cost of a bonus (12.8% ErNIC and either 33% or 41% marginal employee costs) is almost guaranteed to outweigh the cost of an employer contribution - don't forget, the employer contribution also benefits from the high marginal rate of CT relief!

    For example: employee with standard £5k salary plus divis, and a bonus of £50k. The bonus, after tax and NIC, would enable him to make a grossed-up pension contribution of c. £45,500*, at a net cost to the company of c. £38,000. By contrast, the employer could put c. £56,000 into the pension for the same cost.

    * This involves investing the net bonus, then reinvesting his HR relief.

    Thanks (0)
    By nick farrow
    17th Oct 2005 16:55

    Many thanks Andrew
    I take your point Andrew - the specific example I had in mind was a co. with a year end 30 Sept - the A day rules not being available til April 2006 I am thinking that maybe of large a bonus being paid in April 2006 and accrued in the Sep 2005 acs. The tax on the bonus paid in 06/07 could then be relieved by a personal contribution into the Sipp

    Thanks (0)
    By AnonymousUser
    14th Oct 2005 13:14

    2 hands

    QUOTE: no matter what financial storms blow across your decks between now and the day you reach the minimum age, your pension savings will not be there to bail you out.

    This can of course be a plus point. Pension planning is for retirement. If you want flexibility then, as the article points out, ISAs are the preferred route.

    Thanks (0)
    By andymeeson
    14th Oct 2005 13:52

    Good piece of myth-busting
    However, it does peddle one or two myths of its own!

    "you will be able to invest the lower of: your entire annual earnings; or £215,000"

    Not entirely true. You can invest as much as you like, if you are indifferent to obtaining tax relief on the contribution. £215k is merely the limit on tax-privileged contributions.

    This may sound odd, especially given Nick's comment that it's all about tax breaks. however, it's a major new opportunity which gets too little coverage.

    Under current rules, if you have no earned income, all you can put into pensions is £2,808 a year (grossing up to £3,600). Post A Day, you can put as much in as you want - admittedly you won't get tax relief on it, but you will gain access to the tax-free growth within the SIPP. For the first time ever, people on investment income only can contribute to pensions...

    Alternatively, your employer can contribute the £215k for you regardless of the level of earned income - the old need to maintain some level of "pensionable" or "relevant" earnings will no longer be there for SME proprietors.

    "there is a misconception that if you die early your surplus annuity capital goes into the life insurance company’s coffers. This is actually not the case. The money is used to pay the pensions of those who live longer and who end up getting significantly more income than they originally paid in."

    From the point of view of the short-lived annuitant, precisely how is that a comfort? In any case, there is normally a large timing difference between capital forfeited to life companies on early deaths and the annuity payments made to the long-lived. The life company most assuredly profits from the cash-flow advantages of what is euphemistically termed "mortality gain".

    "the SIPP providers – are quite picky about the types of property they allow."

    True enough if you are talking about life companies, actuaries and the rest of the financial services industry.

    But, of course, it doesn't have to be like that. ICTA 1988 s.632(1A) - and, from A Day, FA 2004 s.154(1) - allow any employer to establish a SIPP for its directors and/or employees. The trustees of the scheme, apart from an independent Pensioneer Trustee, will be the directors of the company.

    I have been assisting companies to establish such schemes since it became possible in 2001. My Pensioneer takes the view that, as long as an investment is legal and justifiable, he will not place any additional fetters on the choices of the other trustees. I know he is not the only PT for whom that is the case. If you are prepared to shun the major providers, there is more freedom out there than they would have you believe...

    However, I don't want to seem unduly nit-picking. Overall this was an excellent article.

    Thanks (0)
    By David Cane
    16th Oct 2005 12:56

    SIPP employer contributions
    Andrew Meeson states that "some level for pensionable or relevant earnings will no longer be required for SME proprietors".
    The standard practice is for the owner director to pay himself a minimal salary, say £5,000, and the rest in dividends. If a large employers contribution (say £50,000 or more) is paid into the SIPP, then only part of it may be tax deductible.

    Thanks (0)
    By nick farrow
    17th Oct 2005 09:49

    who should contribute employer or employee
    further to David's point there will surely be cases (especially where marginal ct rate over 30%) where it is worth the company paying a large PAYE'd bonus and for the employee to make the contribution (I assume net of BR tax)

    Thanks (0)