Forward Diary

SIPPs - For Wealthier Investors

SIPPs are great products that can help investors of all shapes and sizes, but their power and flexibility is really showcased when it comes to high net worth individuals The range of SIPPs has broadened so much in recent years that it is difficult to see it as one product any more. At the low-cost end, the line between SIPPs and personal pensions has become increasingly blurred as insurance companies have expanded their traditional pension fund ranges to make the products more flexible. Some would argue that cheap and cheerful SIPPs that don’t offer access to the range of investments allowed by HMRC should not even be carrying the label at all. At the top end of the market some of the big life insurers have been muscling in on ‘high net worth’ business, which until recently was the preserve of SIPP specialists. Standard Life recently added a specialist investment team to advise wealthier customers and added an enhanced property service, while Legal & General bought property-specialist SIPP provider Suffolk Life a couple of years ago. Commercial property is an important element of the offering for high net worth investors – loosely defined as those with at least £1m of investable assets – as well as many others with lesser amounts to invest. A SIPP is particularly useful for small business owners, allowing them to buy their premises and hold them tax-efficiently with- in their pensions. Property Popular types of property acquired by SIPP investors include offices, shops, industrial units, hotels and farmland, which can be owned on a freehold, leasehold or common- hold basis. Suffolk Life says some of the more unusual acquisitions it has dealt with include a zoo, a fishing lake, a football stadium, a parking space and a casino. Following rule changes on borrowing in 2006, however, SIPP holders have had to alter their ambitions somewhat when it comes to property. Previously the SIPP could borrow up to 75% of the value of a property but now the maximum loan is 50% of the value of the fund itself. Private equity Another area that has increasingly interested wealthier SIPP investors looking for high potential returns and willing to take on the level of risk involved is private equity. Direct investment in shares of unquoted companies presents problems from a SIPP perspective, though, partly because they are illiquid and difficult to value, so some kind of third-party management structure is preferable. Venture Capital Trusts (VCTs) have proved popular with some investors and financial planners. These are companies listed on the LSE and subject to strict investment criteria. As long as investors hold their VCT shares for five years, they are entitled to 30% income tax relief on investments up to £200,000, tax-free dividends and tax-free capital growth. It is possible in the right circumstances to combine a VCT investment with a SIPP, in effect gaining two levels of tax relief. For example, a £10,000 initial investment could be made in a VCT, attracting 30% income tax relief, and the fund then transferred into a SIPP after the qualifying period. This would further attract both basic rate and higher rate tax relief, if applicable. In that way, the net cost of holding £25,000 in a SIPP would be just £4,500 for a higher-rate tax- payer (ignoring investment performance and charges). Other routes into this asset class include private equity investment trusts – pooled vehicles which are quoted on a stock exchange and which invest principally in a range of unquoted companies – and structured products.   Allowable investments – a grey area A full-service SIPP allows access to many asset classes which normally fall outside the radar of lay investors, such as hedge funds, derivatives and private equity. Unless the SIPP holder is a so-called ‘sophisticated investor’, he or she would normally only be investing in these areas with the help of professional advisors. Clearly this type of service would involve extra fees on top of those charged by the SIPP provider. However, many wealthy investors have discovered the financial advantages of a bespoke SIPP, with the tax benefits outweighing the costs involved. Rules on allowable investments in SIPPs were eased in 2006 but unfortunately for investors the situation is not as clear-cut as it should be. At the same time, HMRC tightened up the conditions under which it will make heavy tax charges for ‘inappropriate’ use of a pension fund. As a result, SIPP trustees and administrators have become wary of accepting investments which they believe might lead to such a charge. According to Barclays Stockbrokers, these include assets that: cannot be easily evaluated, such as complex offshore vehicles possess difficulties in trading – for example, those traded periodically by vote rather than regular pricing are difficult to price could be considered ‘personal use’ assets, eg. bonded wine are comprised of a physical asset, such as gold bullion have geared exposure, ie. derivatives have leveraged gearing which can multiply volatility and 
losses – for example any holding that has over 50% lending. That is not to say that any such asset should be ruled out – simply that it may be difficult to find a SIPP provider prepared to risk the wrath of HMRC by allowing it. 
   All that glisters 
 Gold bullion is a prime example of an asset with attractive possibilities for high net worth investors – especially at a time when the price has been climbing relentlessly amid fears of global economic meltdown. But is it allowable in a SIPP? Some experts say ‘yes’, within certain conditions. 
The type of bullion required for a gold SIPP has to be of very high purity – not less than 99.5% – and in the form of a bar. This is because such ‘good delivery bars’ are recognised by the bullion market. 
The bullion must stored in a third-party secure area – a condition which would normally apply to any gold bullion investments. The investor cannot take possession of the gold, as it would then become difficult to re-sell. Given the difficulties presented by SIPP investment in physical gold and associated costs, it may be difficult to see why anyone would want to bother when there are securities such as ETFs available on recognised markets that provide exposure to the gold price and are easy to trade. Bullion firms however point out that there is no counter-party risk involved in owning physical gold, unlike ‘paper’ assets where you are dealing with the security provider. In other words, if you are worried about the potential collapse of the world financial services markets and the prospect of gold securities not being worth the paper they are written on, owning the yellow metal itself may be the one thing that helps you sleep at night. Property may seem a more clear-cut area of investment for a SIPP – ie. as long as you steer clear of residential property it should be allowable. However, there are still grey areas. One recent example of this is wind farms. Under HMRC rules, a SIPP which invests in ‘tangible, moveable property’ is subject to an initial tax charge of 40%, negating the tax relief. Recently specialist SIPP provider James Hay declared it would accept wind farm investments on the grounds that ‘a wind turbine is not tangible, moveable property because you cannot take it away’. One firm that allows alternative investments through a SIPP, once they have been approved by the scheme’s trustees, is Carey Pensions UK. Among the alternatives that clients are currently investing in are forestry projects, carbon-offset funds, hotel rooms abroad in places such as Cape Verde and a football fund. There is an increasing request for pension scheme members to invest in smaller unquoted companies and the firm also allows this. Carey says it looks at the investment products from an HMRC-rule point of view, not from a suitability point of view, and all clients are urged to take advice. It plans to provide an on-line SIPP during 2011 and also Affinity Group SIPP schemes. In specie The concept of in-specie contributions – transferring an asset rather than cash into a SIPP – has lots of appeal for investors who have plenty of assets, either in their own name or their company’s, but would not otherwise be able to con- tribute due to lack of available cash. However it is vital to have the correct processes in place before going down this route, for in-specie is the proverbial can of worms. HMRC needs to be confident that an in-specie transfer is in lieu of a cash contribution that had been intended initial- ly as a monetary amount. The asset and the contribution should not be linked from the outset. Once a commitment has been made to make the contribution, the provider has requested it and there are no funds to do so, an irrevocable debt is established. After that the investor can offer to cover the debt with an asset. This is a shortened version of a complex procedure, and it takes an expert SIPP specialist to handle it. Cunning plans Financial planners seem to love creating clever schemes around tax-efficient vehicles such as SIPPs. One such wheeze is the Family SIPP, which is aimed at enabling family members to pass pension fund assets to other members without breaching legislation, using one pooled fund rather than multiple SIPPs. It appears a few SIPP providers who studied the legislation found it was possible to ‘allocate’ any investment growth in assets within the SIPP to other members in a specific manner, as long as all members agreed to the re-allocation. One attraction of a Family SIPP is the younger generation members can make contributions and transfer assets in from other registered pension schemes to create liquidity for older members retiring. For high net worth individuals, capital protection is often uppermost in their minds, and that includes protection from the tax man as much as anyone. There is an army of professionals out there to help them. Most of us, though, have more modest needs. You don’t have to be rich for a SIPP to be part of your financial planning. In this section, we show some case studies which give an idea of how some individuals have benefited, with the help of their advisers and SIPP providers.   This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions.