Friday 19th December 2008 Blog

Increase Your Clients Pension Fund Value

 
The recent downturn in world stock markets has reduced the value of many pension funds. If your clients are nearing their expected retirement date they may well want to boost the value of their pension fund for it to have sufficient future income to pay out the required level of pension.

One way to boost their pension fund is to liquidate some of their personal investments and pay the proceeds into their pension scheme. If their investments are worth less than their cost price they will make a loss on the sale, but this loss will be available for them to use in the future to reduce the taxable amount of their future capital gains. If they make a gain on selling their investments that gain will be taxable, but they can set their annual exemption of £9,600 against their total of their gains before the balance is subject to capital gains tax at 18%. The contribution they make into their pension fund will also attract tax relief at their highest rate of tax. If they pay tax at 40%, half of the tax relief is reclaimed by the pension fund and the remaining 20% by them. This tax relief could help your client recoup the losses on their investments.

If they have a self invested pension scheme (SIPP) they can transfer their investments directly into the pension fund, with the agreement of the fund administrators. This sort of contribution is called an in-specie contribution. The transfer to the SIPP is still treated as a disposal by them at market value, so a gain could arise although they will have no actual proceeds. If the gain is less than their annual exemption no capital gains tax will be payable. The advantage of transferring investments to their SIPP is that they can claim tax relief at 20% on the market value of the assets transferred, and the investment remains under their control in their SIPP.

The following types of investments may be transferred as in-specie contributions into a pension fund:

- Commercial property in the UK or abroad;
- Hotels, guest houses and nursing homes;
- Riding stables;
- Forestry, woodland and agricultural land;
- Non-income producing land;
- Shares in unrelated companies, including;
  - VCT shares
  - EIS shares
  - Shares acquired from employee share schemes
  - Shares in Real Estate Investment Trusts (REITS)

The shares do not have to be quoted on a stock market, but unquoted shares must be valued on a fair market basis before the transfer. Some of the above investments may be held by your clients company, in which case the company could make an in-specie pension contribution as their employer.

The value of the total contribution should not exceed the tax free annual allowance for the year, which is currently £235,000.

IMPORTANT: Your clients should seek advice before making a transfer of any investment, as there are detailed regulations to abide by in each case.
 

Posted by: Bookcert Mentoring Team

Friday 19th December 2008

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