Author: Mat Tillett, 25 March 2004.
The Chancellor’s budget threw up an exciting new area of pension planning: from April 2006 individuals will be able to invest in residential property for their pension fund. They can even purchase their own home as part of their pension. Here John Pullin of ABCO, the financial services division of the Norwich-based Alan Boswell Group, looks at some of the ramifications, including the potential tax advantages.
This new opportunity is part of the Government’s proposal to simplify pensions: the existing eight pension tax relief regimes will be replaced by one universal regime. Meanwhile the numerous rules in the current system will be replaced by two key controls governing the maximum benefit from tax relief: a lifetime allowance and an annual allowance. These initially being £1.5 million & £215,000 respectively.
The relaxation of the rules governing investment choice will have a dramatic impact on many people’s pension funding. As well as allowing investment in residential property, you will be able to invest in, for example, works of art. And claim tax relief of up to 40%. Of course, all such investments will be subject to the Department of Work & Pensions requirements.
Residential property can include your own home, a second home, a holiday home overseas and “buy to let property”. You can also invest in commercial property, including those occupied by companies you own or part-own.
Pension funds can borrow to help purchase a property this will be limited to 50% of its asset value. Thus if a property (residential or commercial) is to be purchased, it will be essential to have accrued a sizeable pension fund. Loans from the pension to employers are limited to 50% of the fund’s value. The loan must be backed by the security of a first charge on company assets, equal to the loan’s value, and it must be paid back within five years with interest at 1% over base rate.
When considering the tax implications of the new regime, it’s important to remember that property will be sheltered from capital gains tax and inheritance tax within the pension fund. In addition, all contributions to the pension will attract tax relief at the individual’s highest rate of tax. Plus, rental income received by the pension is invested in the friendliest possible tax environment – in the pension fund, it is not subject to tax.
By the way, there’s no need to worry about the new regime in terms of investments made prior to 6 April 2006, as any that do not comply will be protected. More details about all aspects of the proposals will be available after the publication of the Finance Bill in April 2004.
It is worth remembering that, just like stocks and shares, property values can go down as well as up. Whilst there are clear tax advantages with the new system, if you decide to invest in property it makes sense to consider all possibilities, including the implications of a slump in property prices.
One last point: the new regime is operative from April 2006. But if you wish to take advantage of purchasing residential property, whether it is a buy to let, or your own home, or a holiday home here or abroad, then you need to start to fund and plan your pension as soon as possible.
Alan Boswell Insurance Brokers Limited, Alan Boswell Insurance Services Limited and Alan Boswell & Company Limited are authorised and regulated by the
Financial Services Authority.
