Taking the SIPP

The Pre-Budget Report contained a number of significant changes to the new tax simplification pension regime, which is due to come into effect on 6th April 2006 (A day). The Budget release said, "To prevent potential abuse of the simplification rules, where people could claim tax relief in relation to pension contributions into SIPPs for the purpose of funding purchase of holiday and second homes for their or their family's personal use, from 6 April 2006 SIPPs and all other forms of self-directed pensions ( e.g. SSAS) will be prohibited from obtaining tax advantages when investing in residential property, and certain other assets such as fine wines."

However the same statement goes on to say that SIPPs will be allowed to invest in genuinely diverse commercial vehicles that hold residential property such as the proposed Real Estate Investment Trust (REIT) model on which consultation will shortly take place. But the government has issued a warning that it will act in this area as well if it becomes clear that collectives are being used as a vehicle to get round the rules for prohibited assets, for example; pension schemes acquiring controlling interest in residential property investment companies.

Other key elements of the changes are:

• Details of proposed legislation arising from the discussion document on Inheritance Tax and Pensions Simplification issued in July of this year will be issued in the 2006 Finance Bill.
• Recycling of tax-free lump sums to artificially generate additional tax relief will be prevented.
• Individuals will be eligible for re-employment with employers with whom they had taken pension rights with the benefit of a protected pension age, subject to certain conditions.

There was no indication as to the likely outcome following the government's discussion document on the inheritance tax and pensions simplification issued in July 2005. Any amending legislation will need to be included in the 2006 Finance Bill. Any change will be introduced in advance of A Day (although this is will be effective from 6th April 2006) so that certainty will exist before the new regime is in place.

The Pre-Budget Report also closed off potentially lucrative loopholes. The Chancellor announced that action will be taken to prevent abuse of the proposed rules for tax-free lump sums, by removing tax advantages if they are recycled back into funds to generate artificial levels of tax relief.

This knocks the 'turbo-charged' pension on the head. It had been previously suggested that a pension holder could vest the initial fund and from that fund pay back the lump sum as a net contribution along with any unsecured pension with a view to then vesting these funds within a 12 month period to then continue to repeat the cycle. Thus the same money would be re-cycled to continue to receive new tax relief ( in the case of the lump sum) and remove the tax charge( in the form of the unsecured pension) eventually, in theory stripping the unsecured pension fund from a taxable environment for retirement income and death benefit to one which was far more tax efficient. Attempt to do this after the revisions announced with the Pre-Budget Report and you face a hefty tax charge.

From A-day the minimum retirement age will be 50 (increasing to 55 from 6th April 2010) but schemes with a lower protected pension age will benefit from transitional rights. However, one of the conditions relating to protection of this right is that the individual ceases service with the relevant employer. This could have effectively prevent you from being re-employed by your company. However, what is now being proposed is to allow later re-employment, so long as the aim is not to avoid employer or employee national insurance contributions on your pension entitlement.

There had been some rumour that there would be an announcement that A Day would be put back. There was no such announcement, which leaves just over 100 days until implementation of the new tax regime.

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