This article appeared in the Yorkshire Post on Saturday 30th September 2006.

Getting to Grips with the New Pension Rules

Jeremy Gibbs G&E Wealth Management Consultant

In the last year we have commented on the new pension ‘Simplification’ legislation, as proposals became policy. As the fantasy of owning residential property within a pension fund faded and the reality of the new rules dawned, we can now reflect on what impact these changes have bought us and how they can practically applied. So what’s hot, what’s not and where are advisers looking to create opportunities for clients?

Let us start with contributions. Of significance to incorporated companies is the ability to contribute up to £215,000 per annum (for 2006/07) into an individual’s pension fund regardless of earnings. Caution must be heeded, as contributions must be deemed ‘wholly and exclusively for the purposes of trade’ therefore careful planning with your tax consultant is essential. But for companies looking to redirect taxable profits or reduce cash balances without creating taxable benefits such as bonuses, this solution is a must to consider.

Then we have ‘in specie’ contributions whereby assets can be placed into a pension arrangement as a contribution attracting tax relief by way of an asset transfer. For example, a company that owns its own trading premises can contribute a specific share of the open market value to their pension fund and claim the transfer as a deduction for tax purposes. This is significant for succession planning issues, as it gives the owner managed business the chance to not only build up pension funds, but also to separate the assets from the goodwill of their company, whilst still retaining ownership of the assets through their pension fund. Why is that significant? Because it gives the vendor the option to sell the business with or without assets, such as the trading premises, thus increasing the marketability of their business.

Another is owning assets on a shared basis with yourself. This was previously prohibited under the ‘connected party’ conditions, which stipulated that assets could not be held jointly by your pension with you or your relatives. The removal of this restriction will help clients who fear that pension assets alone are undesirable as benefits cannot be enjoyed until 50 (or 55 from 2010). Whilst no one can deny the tax advantages of pensions, such as tax relief on contributions, no capital gains tax on growth or income tax on rental income, the inability to access capital until retirement is seen as a disincentive to some. But now you could buy a property jointly with your pension fund meaning an element enjoys the tax advantages, whilst the other element offers access to capital if and when required. This feature offers much more flexibility for purchases and using your pension fund in conjunction with you or your business assets increases your purchasing power.

The benefits of increased flexibility don’t just stop with an individual trading company. These rules now also apply to investment companies, for an investment company can now contribute to a standard pension arrangement, enjoy the tax benefits and purchase property.

The removal of the compulsory annuity purchase requirement at age 75 takes away what many saw as the greatest barrier to significant pension funding. As your fund need not be annuitised it should pass to your dependants or your estate, on death, creating an inheritable asset, albeit this comes with tax consequences such as inheritance tax. Nonetheless this still enables your fund to pass to the next generation. The Government have, however, stressed the removal of the compulsory purchase annuity requirement was only intended for those with religious objections to annuities and not an option to be exploited by all and that further legislation could follow – we shall have to wait and see!

But not all news is necessarily good news. The new pension fund borrowing limit may have limited the ability to gear up, which could be significant when purchasing property. Pension funds can now only borrow 50% of their net assets but this now includes funds held on behalf of members drawing benefits. At Garbutt & Elliott a pioneering approach has been found where commercial properties can still be purchased for small deposits, in certain circumstances, thus easing the problems associated with these new rules. A conference at Hazelwood Castle is being held on October 10th to highlight how this pioneering scheme can be used for certain individuals.

So pension simplification may not be simple but pension funds can still be effective and there are opportunities that have been created.