Category Archives: Pensions

Nine Things you Need to Know about Buying a Commercial Property With a Pension

We recently blogged on the relative advantages of property and pensions as investment strategies. As part of the article, we looked at commercial property and how this can be used to combine the merits of both property and pensions.

Buying a property using a pension fund comes with its own set of rules and isn’t the right strategy for everyone.

Here we look at nine things you need to know if you’re considering using a pension to fund a property purchase.

What type of property

The rules on the type of property that a pension can purchase are fairly tight and do not allow for the purchase of residential property. Any property you buy in your SIPP or SSAS must therefore be classed as commercial. Where a property is classed as mixed use, for example a residential flat above a shop, only the commercial part of the building can be purchased using the pension.

What type of pension

SIPPs are the most common type of pension used to purchase commercial properties but don’t assume that every SIPP allows property purchase. Pension providers usually charge set-up fees, property purchase fees and annual fees that vary significantly from provider to provider. There are also other things to consider when choosing a SIPP provider, including whether there is online access and the capability of the provider of meeting your timescale for the transaction.

Financial planners are able to recommend suitable SIPP providers for the transaction and will assist in setting up and moving funds to a new SIPP where required.

Borrowing

Both SIPPs and SSASs can borrow up to 50% of the scheme’s net assets to fund the purchase of a commercial property.

A property can be purchased irrespective of whether it is your or another business trading from it. However, if you are borrowing to fund the purchase, the lender will need to either be satisfied that your company can afford to pay the rent or that there is sufficient market demand.

Flexible additional funding options

Although the rules on the type of property you can buy are strict, there are a number of methods by which the purchase of a commercial property by a pension can be funded. This opens the door to commercial properties for a wider range of pension holders.

Some of the ways you can fund the purchase of a commercial property with your pension include:

  • The pension borrowing money from a bank
  • The pension buying the property jointly with another pension – ideal for companies with a number of directors
  • The pension buying the property jointly with your company or with another party (including you personally)

Should further cash be accumulated in the pension over subsequent years, buying the remainder of the property could be an option in the future.

Lack of liquidity

One of the main drawbacks of purchasing a property using a pension is lack of liquidity. If the property has not been sold by the time you retire, your pension will potentially have a relatively small amount of liquid assets to draw from. Depending on your financial situation and whether you have other investments to fund your retirement, this may or may not present problems. As such, the purchase of a commercial property with a pension is not suitable for everybody and seeking advice well in advance of retirement age is recommended.

Lack of diversification

A property will usually comprise the majority, if not all, of a pension fund’s assets so by purchasing a property, you run the risk of ‘putting all your eggs in one basket’, or in technical terms, over-exposing yourself to a single asset class. Should commercial property prices experience a downturn, this could have a significant effect on your retirement fund. Diversification between asset classes is generally considered to be one of the fundamental strategies to successful investing and this needs to be carefully considered before any purchase is made.

Lifetime allowance issues

Assessment against the Lifetime Allowance could force the property to be sold during retirement without consideration of whether the timing of the sale is optimal.

No cheap deals

Whilst transactions between connected parties are permitted, such as a pension purchasing a commercial property from the member’s company and subsequently leasing it back, there are strict guidelines. The property must be purchased at market value and any future sale of the property must also be in the best interests of the pension. The rental value of the property must also be evidenced by a report from a Member or Fellow of the Royal Institute of Chartered Surveyors (MRICS or FRICS).

Tax breaks

The tax breaks available for those purchasing a commercial property with their pension are one of the most appealing aspects to consider.

These include:

  • No capital gains tax will be payable on the proportion of the property owned by the pension if it is sold in the future
  • The pension pays no income tax on rent received
  • The rent payable is tax deductible for the company (beneficial if operated by the member’s company)
  • Properties held within a pension are not subject to inheritance tax if the pension holder was to die

Buying a property with a pension is a complex transaction and we would always recommend that you seek advice. Our financial planners can help you decide whether a commercial property purchase is right for you, and should you choose to go ahead, ensure that you have a quality pension product in place and make full use of the tax advantages of the strategy.

To speak to one of Gresham Wealth Management’s financial planners, please contact us.

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Mind the Gap – Pension Planning for the Self-Employed and Micro Business Owner

Auto-enrolment seems to be working.  According to figures recently released by the Office for National Statistics (ONS), the proportion of employees contributing to a company pension in 2017 reached 73 per cent, up from less than 47 per cent in 2012. This means that the introduction of auto enrolment has led to 9.5 million more people saving into a workplace pension since 2012.

This is good news for the Government and for employees, but what about the many millions of self-employed workers in the UK or those employed as the single employee in their own company? Currently, there is no obligatory arrangement for these individuals, which means that there is still a potentially huge ‘pension gap’.

Whilst many business owners wish to concentrate on establishing and growing their business, ignoring the need to start building a diverse portfolio of personal wealth from an early age could significantly limit options in later life.

Throughout their working life, business owners enjoy flexibility that employees do not. However, the greater structure imposed on employees in terms of saving for retirement often leaves them in a better financial position with greater options when it comes to ‘hanging up the briefcase’. Saving for retirement from an early age (ideally from your 20s) can allow a significant pension pot to accumulate by the time retirement age is reached.

For those with little knowledge, opening a pension can be a daunting prospect. So where should you begin?

How much to save

If you have not commenced meaningful pension contributions until your 30s or 40s, you may feel as though you need to play catch up. There is a rough guide that the percentage of your salary/earnings that you pay into a pension annually should be roughly half your age at the time you commence contributions. So if you’re 32 by the time you start your pension, this theory says you should aim to designate 16% of your earnings to your pension. This may appear excessive, but rather than being put off, have a serious think about what you can afford to set aside each month. The alternative to this would be to make lump sum contributions either once or twice a year, once you know how healthy your bank account is looking and what your liabilities (planned outgoings, tax payments etc.) are likely to be.

What type of pension

There are many different types of personal pension that you can contribute to. When choosing which type of pension is suitable, it is important to consider the features of the product and the investment flexibility it offers. Choosing the right type of pension is of particular importance when you reach retirement age as not all pension products provide the flexible access offered under pension freedom legislation.

Faced with all these options, it’s perhaps not surprising that business owners often prefer not to think about pension planning!

Method of funding

Those who are a self-employed (sole traders and partners) will fund their pension using their personal savings or income/ profits deriving from the business. Income tax relief is provided on contributions made in this manner.

Those who are directors of a limited company, however, have the alternative option of paying into the pension directly from the company. Corporation tax relief is available on contributions made in this manner. For directors of limited companies, this can be a simple and effective way of tax efficiently extracting cash from a company.

Ongoing management

There are a number of DIY investment platforms available and it is possible to set up a pension by yourself. However, if you’re not familiar with pension products and financial markets, constructing a portfolio of investments with a strategy suited to your objectives and risk profile may be impractical.

Those who are self-employed or directors of their own Company should ask themselves whether the time required to research and manage investments is worthwhile. In many instances, a quality financial planner will have greater expertise and resources to manage wealth in an appropriate and considered manner.

Contact Gresham Wealth Management

For more information or to speak to one of our financial advisers about setting up a pension, please contact us.

 

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Focus On: Pension Nominations

By now, we’re all fairly well versed on the various flexibilities associated with ‘pension freedom’ legislation.

Pensions now have the potential to be an extremely tax efficient vehicle via which to transfer wealth. If you’ve built up a substantial pension pot and are able to retain as much of this as possible by drawing a retirement income from other sources (such as ISAs, collectives and bonds), you may think that you’ve got it sussed. By avoiding accessing your pension funds during your lifetime, less of your wealth will fall into your estate, thus reducing or mitigating Inheritance Tax liability. Furthermore, if you die before the age of 75, the entirety of your pension can be inherited free of tax (IHT and income) for your beneficiaries to access as they wish.

On the face of it, this is the case. But surely it can’t be that straightforward? There must be a catch somewhere! Indeed, there is some lesser-publicised small print.

In order to be able to benefit from all of the flexibilities, you’ll need to ensure the necessary requirements are in place. Let’s look at some of the issues that surround so-called ‘death benefits’, particularly pertaining to nominations.

Have you got the right pension?

Not all pension schemes can offer the full range of death benefit options. Some schemes have not adopted the full flexibilities or don’t have the systems in place to offer them. In fact, over the last few years I have reviewed countless contracts that will only provide lump sum death benefits. If a tax efficient legacy is important to you then you may need to consider moving your pension to a contract that will allow you to benefit from the full range of death benefits available under the current legislation. However, this decision shouldn’t be rushed into as your existing pension contract may have other very valuable features – such as guarantees, guaranteed annuity rates or enhancements to tax free cash – that need to be balanced against death benefit flexibility. Who said pensions were simple?!

Have you made the right nominations?

It is in fact up to the trustees of your pension to determine who should benefit from your pension on your death. This may sound worrying, but their discretion is important because without it, there could be significant and needless Inheritance Tax consequences.

A death benefit nomination, however, helps to guide the scheme trustees/administrators when exercising their discretion. The last instructions they receive will be used to guide their decision, so it’s vitally important that nominations are regularly reviewed. The more information you can provide regarding the payment of benefits, the better.

The rules now allow for someone who is not dependent upon the deceased (for example, their adult children) to retain the pension fund inside the tax efficient wrapper and draw an income as they require (this is commonly termed ‘inherited drawdown’).

But there’s a little known trap that can prevent this from happening.  If there is a surviving dependant (e.g. a spouse or disabled child), inherited drawdown can only be offered to someone else if the deceased had nominated them during their lifetime. Without that nomination, their adult children, for example, won’t be able to choose inherited drawdown, meaning the only option is to pay them a lump sum. Although a lump sum might seem an attractive proposition, if death of the pension owner occurs after age 75 then this lump sum payment will be subject to the non-dependents’ marginal rate of income tax and could result in an eye-watering amount of tax due immediately and unnecessarily. Furthermore, the net amount received would then come out of the pension wrapper and form part of the non-dependents’ estate. Had they had the ability to move into inherited drawdown, they would have been able to nominate their own beneficiaries and the fund could have cascaded through generations to come without Inheritance Tax implications.

Issues may also arise where people nominate their spouse to inherit 100% of the benefit of their pension. Although this may be the right option in many circumstances, family life has undoubtedly become more complex in recent years. Those that have remarried and/or have children from previous relationships may want to re-visit their nominations to ensure their current spouse is taken care of upon first death, as well as leaving instruction for any remaining pension fund to be passed to their own children upon second death.

For those with large estates, building in some flexibility on first death is also important. If your spouse is never likely to need the value of your pension, it may be advantageous to allow your adult children to benefit from the fund upon first death as opposed to second death, which could occur much later on in life. If this nomination is in place and the pension holder dies before age 75, the full death benefits of the pension could be realised and the entire pot passed tax free into the beneficiaries’ hands.

Additionally, many people omit to specifically detail how they would want benefits to be treated if both they and their spouse died together.

The time is now

Whilst we cannot place any obligation on the trustees of your pension, a carefully worded nomination form can help to ensure there is some flexibility should the worst happen.

It’s easy to think that these decisions can be left until another time. However, an untimely death or the diagnosis of a serious illness can mean that what you would have liked to happen to your pension savings cannot be followed through.

Nominations can normally be changed at any time and should be regularly reviewed. Changes in your personal circumstances, how much your spouse needs in retirement, or reaching age 75 may all prompt a rethink on how benefits are to be distributed.

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Reasons to Pay into Your Pension Before 6 April 2017 – Part 2

Last week we looked at 5 reasons to consider paying into your pension for in the current tax year before the clock ‘resets’ on 6 April 2017.

Here we look at a further 5 reasons.

For additional advice or assistance in relation to pension contributions, please do not hesitate to contact us.

Dividend changes for business owners

Since April 2016, directors of SME’s will likely face larger tax bills due to the increases in dividend taxation rates. Whilst any dividends over and above the current £5,000 tax free allowance will still be chargeable at the relevant rate, making pension contributions could help to reduce overall tax liability. By making employer pension contributions from profits, corporation tax liability can also be significantly reduced.

Company directors aged 55 and over could divert profits that would otherwise have been paid in dividends into their pension and then withdraw a portion of it tax free (up to their own 25% tax free allowance).

It is worth noting that the Chancellor announced in the Spring Budget plans to reduce the dividend tax free allowance to £2,000 from April 2018.

Pay employer contributions before Corporation Tax relief reduces

Corporation Tax will reduce to 19% as of 6 April 2017, with a timeline to further reduce this to 17% by 2020. In order to benefit from the current rate of tax relief of 20%, companies may want to consider bringing forward pension funding plans.

Sacrifice bonus for employer pension contributions

If you are due an annual bonus as an employee, or now is the time you look to take a lump sum in a dividend from your business as a director, you may want to consider making an additional pension contribution instead. As a bonus often takes you into a higher income tax bracket, receiving a pension contribution instead can result in a significant effective rate of tax relief.  Although salary sacrifice cannot be used to avoid falling into the annual allowance tapering covered in last week’s article.

Boost SIPP funds now before accessing flexibility

Anyone looking to take advantage of the new income flexibility for the first time may want to consider boosting their fund before April, potentially contributing the full £40,000 from this year plus any unused allowance carried forward from the last three years. The Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is currently £10k but will fall to £4k in April 2018 with no carry forward available.

Anyone already in capped drawdown (remaining within pre-set income limits), or who only takes their tax free cash will retain their full £40,000 annual allowance.

Providing for the next generation

Should you choose to make additional pension contributions as a result of any of the above points, or those detailed in our previous email on the same topic, the overall effect will leave you with a larger pension pot to draw on in your retirement, or potentially before thanks to pension freedoms. Since pension freedom legislation came into play, the new death benefit rules also make pensions an extremely efficient way of passing on wealth to family members. In the vast majority of cases, if death occurs prior to the age of 75, family members can inherit the remaining value of a pension fund free of tax (subject to Lifetime Allowance limits).

It is also worth noting that pensions are generally sheltered from Inheritance Tax (IHT) – making a compelling case for transferring funds from other taxable savings environments to the IHT advantaged environment of a pension.

 

If any of these points are relevant to you and you’d like to discuss how best to proceed with your pension contributions for this tax year, please contact us.

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Reasons to Pay Into Your Pension Before 6 April 2017 – Part 1

The end of the current tax year is looming meaning you only have a limited time left to make arrangements to pay into your pension for 2016/17.

Whether you are an employee, an employer or a company director, there are some compelling reasons to look at making additional pension contributions this side of the tax year.

Here is the first in a two-part series of articles looking at the reasons to act now.

Recover personal allowances

Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be received but most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.

If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief.

The highest effective rate of tax relief available is for those with a taxable income of between £100,000 and £122,000. A personal pension contribution that reduces income to £100,000 would elicit an effective rate of tax relief at 60%. For most higher income earners, the effective rate will be somewhere between 40% and 60% – still representing a significant tax break.

Tax relief at highest rates

For the time being the rate of tax relief on pensions savings (as described above) remains relatively generous. It is unclear how long this will be the case, especially as pension savings have regularly come under the spotlight of the Budget in recent years.  In short, the higher rates attracted by personal pension contributions may not be around forever – so act now whilst you have the opportunity to maximise on these.

Avoid annual allowance tapering

If you are a higher earner (over £150,000) you may be aware that the annual amount you are able to pay into your pension tax free may now be liable to tapering. Every £2 of ‘adjusted income’ received over and above £150,000 results in a £1 reduction in your annual pension allowance, until their allowance drops to £10,000.  If you have unused pension allowances from the previous 3 years, you may be able to carry these forward to reduce or remove the impact of allowance tapering.

Last chance for £50k contribution

As mentioned above, pension rules allow you to carry forward previous years’ pension annual allowances, to a maximum of 3 years (currently back to 2013/14).  In 2013/14, the annual allowance was £50,000, £10,000 higher than the current allowance. 5 April 2017 is therefore the last opportunity you have to access this higher allowance available.

Avoid the child benefit tax charge

Child benefit, which can be worth around £1,800 per year for a family with two children, becomes taxable if one of the earners in a household receives over £50,000 in ‘taxable income’ and the benefit is cancelled out altogether over and above £60,000.  Making a personal pension contribution can reduce your ‘income’ for calculation purposes so it may be worthwhile investigating.

 

If any of the above reasons resonate with you and you would like to discuss your options further, please contact us to speak to one of our advisers.

For further reasons to contribute / make additional contributions to your pension before the end of the current tax year, look out for our next article.

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