The UK Personal Pension (Inc SIPP)

In the UK, under the new rules introduced with effect of April 29th 2009, there is still scope for an individual to contribute an amount up to the level of their earnings and get tax relief on their contributions, (as long as their income is not in excess of £150,000). For those who are or have relevant income above that amount, see the document ‘Pensions: Limiting Tax Relief for High Income Individuals’ on the HMRC website or click on the link below. This will entitle a member who makes contributions to tax relief at either 20{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} or 40{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} depending on their earnings. If you are a business owner and your company makes the contribution on your behalf, then your company has saved both the Corporation Tax on the contribution and neither is it subject to National Insurance. Tax Relief on member contributions are an immediate boost to the value of the fund and in the case of a company contribution, it is a very tax efficient manner of securing long term benefits of the company’s wealth for the member. Additionally, if set up correctly, should the member die before drawing the benefits, the value of the funds can pass free of Inheritance Tax IHT) to the chosen beneficiaries. This can be another 40{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} tax saving.

The downside of the tax relief on contributions and the largely free of tax growth on the funds, is the restrictions placed upon access to the funds. Essentially, you no longer have access to all of the capital. When you do take the benefits, (which from 2010/11 will be from age 55+) you can have up to 25{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} of the value of the fund as Tax Free Cash, (TFC). The remainder must be used to provide member benefits. Any benefits over and above the TFC are subject to Income Tax at the prevailing rates. In the interim, as a member you can exercise some control by way of what the funds are invested in. This can be normal pooled investments, directly into equities or even the purchase of commercial property.

The Offshore Unapproved Pension

On the downside, due to the much higher costs associated with the initial set up and operation of such schemes, they are generally only attractive to those considering investing typically £150,000 +. Also, although such schemes may let the member contribute unlimited amounts into the scheme. There is NO entitlement to Income Tax relief on the contributions either for the member or for any employer contributions.

At this stage it does not look too attractive, yet for the right individuals they are popular. Their attraction lays in the longer term tax planning and the choice and control the afford the member.

Once monies are in the scheme, the internal returns are also free of tax.

The scheme can make loans to the member, who can then use the money to spend, (though there may be need to provision repayment at a later date). The member can invest the proceeds and even where appropriate to make a Directors loan back into the members own company. It may be attractive to secure such loans against agreed member assets, thus protecting the wealth against unforeseen future solvency problems a member or his/her business may face.

In addition to the usual investments, the scheme can purchase land, residential and commercial property, even in the UK, it can operate businesses and developments even go into joint business ventures in the UK and the returns it makes on its investments can be tax free. Clearly there is much more choice and control for the member than with the UK ‘approved pension’.

In terms of the member ultimately drawing pension benefits from the scheme, there is far more flexibility and consequently more scope to mitigate income tax.

Again, if set up correctly, upon the members death prior to drawing pension benefits, the assets of the scheme can pass free of IHT to chosen beneficiaries.

Clearly there are other issues to consider when deciding on what avenue one should take but this should serve to notify you the reader, there may be ideal opportunities out there which you are probably not aware of and the importance of looking at the bigger picture when making your decisions.