A-day advantage
4 Aug 08
It has been all change in the field of self-invested personal pensions since the big shake up in 2006. Jack McVitie looks at some of the opportunities and how to make the most of them
by Jack McVitie
A-Day introduced many interesting and potentially beneficial changes to the UK’s self-invested personal pension (SIPP) rules. In particular, the ability to use SIPPs as a tax-efficient vehicle for private equity investments, offered employers a compelling means of encouraging staff to invest in the future of the business.
New SIPP investment options arrived at the same time as a trend for rewarding employees through private equity holdings. The result is a real appetite among employees with private equity to receive the same benefits from their SIPPs as equity holders within public companies.
However, many providers and advisers have been deterred by the potential complexities of using SIPPs in this way — particularly around confidence in the valuation mechanism, liquidity of the asset and even the good running of the share register.
For employees of publicly traded companies, A-Day, when UK rules on pensions were drastically altered in April 2006, removed the restriction on SIPPs buying assets previously owned by the beneficiary. This allows employees to sell shares to their SIPP, for example, retaining the shares in a tax efficient environment while releasing instant cash.
Other rules allow employees to pay shares into their SIPP as a contribution, while attracting tax relief on the payment, as well as permitting contributions of up to 100 per cent of salary in any one year. These have created good investment and tax-planning opportunities for employees.
However, matters are not so simple for employees of private companies. For example, where an employee’s shareholding does not include “moveable tangible assets” over £6,000 or residential property, shares can theoretically be purchased without restriction. Yet, there is some dispute over whether the phrase covers only items such as artworks and fine wine, or whether the rules as written could go further.
If HMRC concludes the percentage of unquoted shares owned constitutes a holding in taxable property and the £6,000 limit has been breached, both the individual member and the scheme administrator face hefty fines and, possibly, a tax charge on any income or gain from the asset. The ultimate penalty could be scheme de-authorisation.
It should also be noted that HMRC limits investments by occupational pensions schemes into sponsoring employers to 5 per cent of the fund value. There is no such limit for personal schemes. If these challenges can be overcome, SIPPs are an attractive vehicle for allowing employees to share in the growth of the company and, importantly, aligning their outcomes to the long-term performance of the business.
JACK McVITIE is chief executive of the independent financial advisory business LEBC Group..