Techzone - Use 'em or lose 'em – Standard Life Pensions Ezine

Standard Life's Pensions newsletter for advisers

Issue 9: December 2007

Three opportunities that vanish in April 2008

With the end of the tax year approaching, advisers’ thoughts are understandably turning to their clients’ tax position. For pension advisers, there are three imminent changes that present excellent pensions-based tax planning opportunities.

Capital gains tax changes: can pensions help ease the pain?
There has been wide speculation that the changes to capital gains tax (CGT) from 6 April 2008 proposed in the Chancellor’s pre-budget report in October could result in a rush of asset disposals to benefit from the current CGT regime.

With pensions simplification ending the old ban on pension schemes buying assets from connected parties, your clients could think about selling suitable assets to their SIPP. Aside from leaving the client in control of the investments, it also shelters them from CGT on any future gains and releases cash from the pension scheme to the client - freeing it up for other uses.
Our investment summary gives an overview of the investments that can be held inside a Standard Life SIPP. See our technical briefings for some reminders on the dos and don’ts of the pension investment and connected party rules.
Remember also that some transactions can take a while to arrange, so don’t leave it to the last minute and risk missing the boat.
Of course, if your clients do have chargeable gains, it is much better if they are only basic rate income tax payers in the tax year. Where gains on business assets are concerned, this could mean an effective CGT liability of only 5% after taper relief. Making a pension contribution can help achieve this.
If an individual makes a contribution to a SIPP, personal or stakeholder pension their basic rate income tax band is extended by the amount of the gross contribution. So, paying the right pension contribution can produce significant CGT savings. And with tax relief now available to individuals on pension contributions up to 100% of their relevant UK earnings in a tax year, there is more scope than ever before to make large personal contributions.
This sales aid for Standard Life’s Offshore Bond explains how it works.

Why not combine both of these opportunities for a real win/win outcome? Your client could sell an asset to their SIPP, then use some of the proceeds to fund a contribution to the SIPP which both attracts tax relief and, potentially, reduces the CGT on the gain.

Income tax changes: get 22% basic rate tax relief on pension contributions while it lasts
With the basic rate of income tax reducing to 20% from 6 April 2008, the run-up to April is a last opportunity for many clients to obtain an extra 2 pence in the pound from the tax man on their pension contributions. This will affect individual contributions paid to SIPP, personal or stakeholder pensions before 6 April 2008.

For example, an individual making a gross SIPP contribution of £1,000 in this tax year would actually only pay a net amount of £780 to the SIPP. Their SIPP fund would then be topped-up with an extra £220 from the tax man.

From next April, the same individual will have to pay £800 with the tax man only coughing-up £200.

As well as considering this for your clients’ own pension funding, bear in mind that the same basic rate tax breaks apply to third-party pension contributions for kids, grandkids and non-working or low-earning partners.

Pre A-Day income drawdown: last chance for a double income year?
Any existing income drawdown plans in place before 6 April 2006 must be reviewed, and moved onto the new unsecured pension (USP) rules, by 5 April 2008 at the latest. For plans that haven’t yet had a post A-Day income review, this can present a final opportunity for clients to enjoy a double income year by taking a full year’s maximum income under the old drawdown rules then immediately taking another year’s maximum income under the new USP rules after their review.

And, although a transfer no longer triggers a drawdown review, why not combine the double income opportunity with a drawdown transfer to a Standard Life SIPP to benefit from the innovative product features and award-winning service? Where drawdown funds that haven’t had a post A-Day review are transferred to Standard Life, we’ll conduct the review immediately.

This opportunity is explained in detail on page 8 of the July 2006 edition of our old Adviser News magazine. For full details of the USP rules, see our technical briefing.

Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Customs practice. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.