News/Events

Building up capital for retirement [1st May 08]

Very few of us can look forward to a final salary pension where the pension is based on earnings before retirement and the number of years in service.  These plans, outside mainly the Public Sector, have been stopped because they are quite simply too expensive for a Company to continue.

Consequently, most Company sponsored arrangements are now based on the money purchase principle and therefore future income depends upon the future retirement fund that has been built up. So it is important to build up as much capital as possible but sometimes there are gambles you can afford to take whilst building up albeit your pension fund may not be one. This will be dependent on your personal risk strategy and the possible time when you would want to take benefits.

With a SIPP (Self Invested Personal Pension Plan) you can put your money where you want whether to be at risk in the equity market via stocks and shares, investment trusts or unit trusts, Bonds, cash accounts plus a variety of other acceptable investment instruments including property such as offices, shops etc – not however, residential or buy to let portfolios. One of my clients has recently moved in specie a garage he owned in North Devon into his pension portfolio. Quite complicated as the garage was valued and this was effectively his single premium pension payment net of basic rate tax relief and then he will get higher rate tax relief.. There are, of course, charges associated with this transaction and indeed going forward but it is now in a tax free environment.

But, it is not just investment control as a SIPP gives the Investor the opportunity to have investment control of both future pension contributions and pensions that have built up in the past and may not now be performing. So many companies have changed their name and that is normally a good sign to look more closely at the returns being given eg a low bonus rate on with profit plan or simply high management charges..

Surprisingly many people in their late 40’s and fifties have, or will soon have, some spare cash – a wonderful thought especially when one has 2 children at University!  As children are moving off their hands and their mortgage is coming or has come to an end and suddenly start looking at their pension benefits and then there is the question of poor performing existing funds as mentioned above, which have little chance of growing in the future. This gives the opportunity of freeing up their plans and taking perhaps a more improved investment stance linked to their new risk strategy.

I have been told there is now £50 billion invested in the SIPP market which is a 25% increase in last year and growing all the time.  It is not surprising as there is further flexibility when coming to take benefits e.g. you could extract your maximum tax free cash and take no income or perhaps some level of income.  The SIPP allows you to take benefits whenever subject to age, that is, fully or partially or to delay taking all of your pension benefits until age 75 by way of a scheme that is known as an ‘income drawdown’ or “pension fund withdrawal.

This gives lots of options regarding cash and income but also has disadvantages as the actual capital value can fall and indeed significantly if too high a level of income is withdrawn coupled with poor investment performance. Also, the position with regards to death benefits changes once a pension plan is regarded as being opened eg some benefit has been derived.

On top of all this a SIPP can shelter the fund from a IHT liability and the residual value can move to your family in the event of an untimely death but it is obviously imperative to seek professional advice as SIPPs are not for everyone as the charges can be higher but it costs nothing to find out by having a chat with your qualified IFA.. 

This article was written by Langtons - Published in the Western Morning News, Money, 1st May 2008