Simplified pensions system helps Sipps to come of age

For those involved in the rapidly expanding world of self invested personal pensions, this year’s Budget statement was quite extraordinary. There was no mention in the Chancellor’s speech of pensions tax simplification – the biggest reform of this legislation in more than 35 years, even though A-day, when the changes come into effect, was only two weeks away.

However, the devil is in the detail on pensions matters and, sure enough, within 48 hours five documents emerged from the Treasury:

Clause 1027 to the Finance Bill 2006 and 30 pages of explanatory notes, which provides anti-avoidance legislation on the recycling of tax-free cash lump sums.

A statement (BN 26) on inheritance tax (IHT) and pensions simplification.

A draft clause 530 and accompanying schedule 530 with explanatory notes – running to more than 100 pages – on “Taxable property held by investment-regulated pension schemes”.

Updated regulatory impact assessment on pensions tax simplification.

Proposed changes to the eligibility rules for establishing a pension scheme – including Sipps.

The announcement on recycling of tax-free cash lump sums follows an earlier consultative document and deals with the situation where an individual recycles some or all of a cash sum received tax-free from a registered pension scheme. To apply, the recycling must have been pre-planned and the recycled amount must exceed 30% of the original lump sum.

The statement on IHT had again been promised and the contents seem to be broadly acceptable. The position where in most circumstances pension scheme death benefits are not subject to IHT will continue to apply up to age 75. However, the Treasury has confirmed that on death at or after age 75, where the individual has elected to use Alternatively Secured Pension (effectively the continuation of income drawdown beyond age 75), IHT will be applied to any leftover ASP funds. The only exceptions will be where the lump sum is paid to the individual’s spouse or other financial dependants, or is left to charity.

In other circumstances, IHT will be payable and will be deducted from the pension scheme assets before any scheme tax charge is levied, where appropriate. This means the much-heralded family Sipp – where the death benefit is passed on to younger family members who are also scheme members – will be much less attractive.

The guidance on “taxable property”, which is in draft form despite its operative date of April 6, 2006, puts in place the new regime for taxing investments that are either deemed to be residential property or tangible moveable assets. There are no great surprises and it appears to confirm that, broadly speaking, direct property investments that were allowable prior to A-day will continue to be allowable without a tax charge. Examples include student halls of residence, nursing homes and hotels.

There are also some interesting provisions regarding what will qualify as indirect investment, which includes UK real estate investment trusts.

The updated regulatory impact assessment is an interesting read, not least because of the cost benefit analysis that is provided for the whole pensions tax simplification process. The estimated industry transitional costs look woefully underestimated.

The document on the proposed regulatory framework for personal pensions and Sipps confirms that the Treasury plans to introduce an FSA-regulated activity related to the establishment and operation of personal pension schemes. Of all the items mentioned, this one could have the greatest impact on the Sipp market. The next step will be FSA consultation, which is promised in April, with implementation planned in April 2007.

The new regulatory framework will also embrace the regulation of “dealing in, arranging and advising on rights under such schemes”. It will have an impact for all Sipp providers and administrators, along with new entrants, and could redefine the Sipp landscape.

Given these wide-ranging documents and provisions, it would be easy to cast doubt over the future of the Sipp market – particularly given the U-turn on residential property investments. However, that would overlook the opportunities that are at the core of the pensions tax simplification changes, especially:

The introduction of full concurrency, under which current members of occupational schemes will be able to take out a Sipp alongside their occupational scheme.

The new annual contribution allowances, which will mean scope for increased tax-relievable contributions for the majority.

The relaxation of annuity compulsion through the introduction of ASP, mentioned above.

The removal of the ban on connected persons transactions, allowing assets owned either through an investor’s business or personally to be purchased by his or her Sipp. This could have a significant impact for small businesses and professional partnerships owning commercial property.

The range of investments permitted, particularly unquoted shares.

Over the past five years, the Sipp market has demonstrated consistent growth at about 25% a year. There is every reason to believe this growth will be exceeded in the years to come.

John Moret is director of sales and marketing at Suffolk Life.