We have looked at Pension Freedoms, (1st October 2105, “The Effect of Pension Freedoms”), so let us explore the other ways pension funds can be accessed or applied to specific outcomes.
Death or serious illness
When people are first saving into a pension, a common question is what happens if they die or fall significantly ill? Most pension schemes will allow funds or a right to receive income to pass to a dependent on death and most will allow early access to pension funds on diagnosis of a terminal illness.
Most pension schemes design their scheme rules around the HMRC, (H.M. Revenue & Customs), requirements, so modern schemes at this level tend to be similar, but there are always exceptions. As pension trust deeds can have a long and complicated history, what actually happens with a death claim or terminal illness can be as generous as releasing all funds immediately as cash, to a more miserly release of only the premiums the member paid in, with the scheme retaining any employer payments. In these cases, it is worth getting some professional financial advice to obtain the best outcome for the family as a whole.
As part of our normal advice process on pensions, we will review the likely outcome of a death claim for the member’s estate, the likely dependents and the tax man, with the assumption that most clients will want the taxman to benefit the least!
Where the scheme is being especially miserly, a transfer out of the original scheme to an alternative with a more helpful regime may be appropriate, despite the transactional charges. An article in The Telegraph illustrates this situation, (http://www.telegraph.co.uk/finance/personalfinance/pensions/11921392/This-pension-loophole-saved-me-176000.html).
The vast majority of pension members are happy to leave pension investments to the pension providers in the form of specific investment profiles. Most new members of workplace pension schemes will be in the “default” pension funds, as few will have taken advice and most will not have the confidence to alter their pension investments once set up. Default funds tend to be “one size fits all”, so it is highly unlikely that it will be appropriate for all.
For the younger pension member, a significant equity exposure is likely to be most effective in the long term, but default funds tend to play it safe. For older members, within 10 years of retirement, there is an underlying assumption of final retirement with an annuity, so the level of equity is reduced over the last 10 years using a process known as “life styling” As more people are likely to use drawdown in the future, it is likely that default funds will be less appropriate and providers will need to reconsider their approach.
For the members who are more engaged with their pension investments there is almost an embarrassment of choice, with most conventional schemes offering 8-10 funds at very low charges and access to 1000s of funds at additional cost.
For the self employed, company owner/manager and family company owners, self-managed investments and investment in own company shares or business property is possible using the correct scheme, admittedly at extra cost and complication.
A business example
Take Graham, the owner of a factory unit, where he runs a business doing MOT tests and some light vehicle repairs. He needs to work out of a factory unit as he needs specific planning permissions and needs to adapt the building expensively with oil and grease traps, a wash-down area, together with specialist equipment. He does not want to be in rented premises any longer than necessary, as he has been made to move more than once already.
He has £100,000 in a stakeholder pension fund, £20,000 in cash retained by the business and has seen a business unit with the required planning permissions nearby for £160,000. Using an independent financial adviser, he sets up a SIPP, (Self-Invested Personal Pension Plan), transfers his existing stakeholder pension into the SIPP and makes an additional pension payment of £20,000 into the scheme. The adviser then helped Graham to raise a commercial mortgage in the name of the SIPP for the remaining money. The purchase account looked like this:
Purchase price £160,000
SIPP money £110,000
Bank Commercial Mortgage £50,000
The remaining £10,000 was spent on transaction fees, including the conveyance, SIPP costs, environmental report, independent valuations and advice fees. The SIPP could have borrowed up to 50% of the total pension fund value, (no more than £55,000), in its own name to repaid on normal terms. The SIPP becomes the owner of the business unit and the Trustee and Graham manage it jointly.
Graham now has to pay rent for the business unit on commercial terms to his pension fund, which is used to pay off the commercial mortgage and ultimately add to his pension fund. This is an allowable expense for tax purposes and as a co-trustee for his own pension scheme; he has control over the development of the unit for as long as he wants it.
Once he gets to retirement he can sell the unit with no capital gains tax to pay as it is a pension asset or retain the unit and let it to a successor business, using the rental income as part of his pension. He can withdraw whatever surplus cash is in the SIPP, reinvest cash into alternative acceptable assets or take a long-term income on drawdown terms, as he sees fit.
If his business falls on hard times before retirement, he can liquidate the business without affecting the business unit. He could sell it, with any profit being free of capital gains tax and retain the profit in the pension scheme, or let the unit to an alternative business.
This scenario will work for any business that needs commercial premises and meets the HMRC rules for acceptable assets. Directly held residential property is not an acceptable asset although a more remote arrangement like quoted shares in a property company would be acceptable.
Areas to seek advice
If you have been placed into a default pension fund then it is unlikely that it will be the best choice for you. What would be better for you depends on a variety of factors including the time remaining to your retirement, the cost of investment, your attitude to investment risk, your anticipated pension income source, what your employer offers in terms of provider and matched premiums and ultimately, how much resources you are willing to put into a pension scheme.
If you have any ambitions over and above “bog-standard”, you probably need an adviser!
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.