Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Andy Bell: my role in shaping the pension rules
Self-invested personal pensions or SIPPs have become the retirement savings product of choice for investors wanting pensions that offer transparency, control, choice and competitive pricing.
key reasons to have a sipp
– Tax relief on contributions at your marginal rate of tax
– Investments grow free of income and capital gains tax
– A quarter of the value of your SIPP fund can be taken tax-free from the age of 55 (age 57 from 6 April 2028)
– Pension income can be drawn directly from your SIPP instead of buying an annuity
– Benefits payable on death are typically free from inheritance tax (though beneficiaries will have to pay income tax where the deceased was 75 or older when they died)
– Investment flexibility, before and after retirement
– Transparency of charges
– Low cost
– You are in control
– All your pensions are accumulated in one place
Key reasons not to have a SIPP
– You are in a company pension scheme that meets your pension needs
– You can only access your benefits from the age of 55 (age 57 from 6 April 2028)
– You can only access your SIPP in the form of a lump sum and taxable income
– SIPPs can’t invest in certain assets, such as residential property
CREATING THE SIPP RULES
The current list of what SIPPs can invest in was fixed in 2006. But in the years running up to these new rules, the government had consulted on whether it should radically open up what SIPPs could invest in.
At the time, the press printed story after story suggesting that holiday homes both in the UK and abroad, racehorses, works of art, fine wine, luxury yachts, flats for your kids and many more eye-catching investments might all be allowable in SIPPs, enabling you to acquire these investments with the assistance of tax relief.
Each week the stories became more outlandish, but the government seemed intent on maintaining its position that virtually anything would be acceptable when it came to investing in SIPPs.
This period of intensive press coverage just served to raise the profile of SIPPs in the eyes of pension savers and their advisers. People weren’t interested in traditional personal pensions or stakeholder pensions anymore, with their usually limited range of investment options. Everyone wanted a SIPP.
What SIPPs can invest in
SIPPs offer access to a wide range of investments from around the world, such as:
– Shares quoted on HMRC-recognised stock exchanges
– Unit trusts and OEICs, also known as collective investments
– Government bonds/gilts
– Corporate bonds
– Permanent interest-bearing shares
– Investment trusts
– Exchange-traded funds
– Exchange-traded commodities
– Full SIPPs may also be able to hold:
– Commercial property
– Unlisted shares
– Unregulated collective investments
MY VIEW ON THE MATTER
I was quite vocal at the time – both in the press and in discussions with HMRC – that I thought this move was madness. I was taking phone calls from Spanish property agents asking if we would run a branded SIPP for them. Considering the significant property slump in Spain following the banking crisis of 2007/08, I imagine the story wouldn’t have ended well.
Anyway, good sense did eventually prevail, and I am led to believe that two events in the run-up to the 2005 Pre-Budget Report, now called the Autumn Statement, caused ministers to change their mind. I was involved in both of those events.
The first involved a Sunday Times article, or, more specifically, its headline. One of the big Scottish insurance companies had put out a press release saying that approximately £10 billion of pension money would be invested in residential property come the day when the new rules were introduced.
The journalist who wrote the story asked me to check her article for technical facts. The article was fine, but I did have a problem with the headline. It read ‘Residential property in SIPPs to cost Treasury £4 billion’.
The simple logic applied by the headline writer was that tax relief at 40% would be granted on this £10 billion, so that was the cost to the Treasury. The point I made was that most of the money that would be used to buy residential property was already in SIPPs up and down the country and hence tax relief had already been granted.
My point was ignored but apparently this headline acted as a wake-up call for ministers about the scale of what they were about to sanction.
SIPPs offer the same tax advantages as traditional personal pensions, meaning basic-rate, higher-rate and additional-rate taxpayers can get 20%, 40% and 45% tax relief on contributions respectively. There are some nuanced differences for those paying Scottish income tax, but the principles are broadly the same. Investments held within a SIPP also grow free of income and capital gains tax.
While mainstream pension plans typically only offer access to a predetermined selection of funds, SIPPs allow you to invest in a far wider range of assets, including unit trusts, OEICs, shares, bonds, exchange-traded funds and commodities.
A quarter of the value of a SIPP can be taken as a tax-free lump sum from the age of 55 (increasing to age 57 from 6 April 2028). SIPPs also give you the flexibility to remain invested in stocks, shares and other investments while you draw a pension income, as an alternative to buying an annuity. All in all, this means SIPPs are an extremely efficient way of saving for the long term.
WAS I SET UP?
While I can probably claim the moral high ground on the dodgy headline saga, I struggle to do so with the second part of this story.
I received a call just before the 2005 October half-term from a BBC researcher asking if I would be interviewed on Newsnight to discuss the impending pension rule changes. Their plan was to do a feature on racehorses, boats, Spanish holiday homes and vintage cars being held in SIPPs. The thought of being on the wrong end of a Paxman-style grilling didn’t appeal, but I did see an opportunity to put forward the voice of reason.
After checking my diary, I realised I was in Spain on holiday that half-term week, so it was all academic. ‘No problem,’ the researcher said, ‘we will meet you in Puerto Banus when we are doing the boat piece and interview you then.’
So, I agreed and duly met up with Justin Rowlatt, the BBC presenter, one Thursday morning in Puerto Banus where we boarded a luxury 65-foot Princess Yacht that the BBC had chartered for the day and set out to sea.
I was asked to stand on the boat, holding a glass of champagne and the filming began. You can probably see what is coming and, to be honest, as the first sip – no pun intended – went down, so could I.
When the interview was aired, the edit did not include my protestations for a government U-turn and instead were replaced with some general musings about pension simplification being welcome.
What was evident to BBC viewers, however, was that the chief executive of this particular SIPP provider would be quids in if these changes went ahead. Look at him celebrate on what could well be his own boat, sipping champagne, soon to be an asset of his SIPP no doubt.
Apparently, ministers were apoplectic with rage and, very soon, I started to hear rumblings that a U-turn was on the cards. On 5 December 2005, the U-turn was announced, so at least the end result was the right one.
This U-turn introduced the concept of taxable property. It was not the outright ban I had hoped for, but instead, tax charges would be imposed should a SIPP invest in any assets that HMRC deemed inappropriate.
Residential property clearly fell on the wrong side of the line, as did racehorses, vintage cars and most other esoteric assets at the heart of the press excitement. But the rules around some other investments, such as unquoted shares, were – and still are – horrendous and unworkable.
It is possible to hold unlisted shares in a SIPP, but there are complex rules surrounding when it is permitted to do so. Many SIPP providers do not allow unquoted shares because of the complexities of ensuring these rules have not been breached.
This is an excerpt from Andy Bell’s book, The DIY Investor: How to take control of your investments and plan for a financially secure future, published by Harriman House.
DISCLAIMER. Andy Bell is the founder of AJ Bell, the financial services company which owns Shares magazine. He owns shares in AJ Bell, as does Daniel Coatsworth who edited this article.
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