On the 5th March George Osborne announce that he would drop the changes that were proposed on 20th January 2016.
The changes that had been proposed were…
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
Pensions are a fantastic way to save tax…
IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.
You can now nominate anyone not just dependents to be the beneficiary.
Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.
Your pension can own Commercial Property, including your own business premises.
In many cases it is better for business premises to be owned by the business owners pension fund because:
- The object of the business is not to own its own property, the objective should be for the business to make profits from trading
- The business could use cash tied up in the premises to invest in trading activities
- Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
- Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
- You may be able to use 3 year Carry Forward to get funds into your pension scheme
Commercial Investment Property
Your pension scheme can own commercial investment property – shops, offices, industrial units.
It can borrow up to a third of the value of the pension scheme.
There is no capital gains tax and no tax on the rental income.
In Specie Transfers
In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.
Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.
In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
Net Relevant Earnings (NRE)
Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.
Employer v’s Employee Pension Payments (Net Relevant Earnings)
Lend Money to your Pension Scheme
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.
25% Tax Free
When you retire you get 25% of you pension fund tax free.
Shares and Loans
SSAS Pensions can lend money to their scheme employer and the scheme employer can borrow from a SSAS subject to passing 5 tests.