Client Affairs

Guest Feature: SIPPS - Its All About Timing and Doubling Up

Ellen Kelleher Financial Times 17 March 2008

Guest Feature: SIPPS - Its All About Timing and Doubling Up

The end of the UK tax year is just three weeks away, but individuals are still being encouraged to "max out" their tax-free contributions to self-invested personal pensions (Sipps). Financial advisors claim that doubling up on pension contributions in a single tax year is a useful exercise for high earners who receive large bonuses. Current rules permit pension investments of up to £460,000 to be made this year by adding next tax year's maximum investment of £235,000 into a Sipp along with this year's £225,000. An individual can contribute his full salary, up to £460,000. The fact that investors are able to combine pension contributions from consecutive years is effectively a tax loophole. "Pension input periods" can stretch a bit further than tax years as they usually extend over a time frame of one year, beginning on the date that the investor makes an initial payment into their Sipp and ending 12 months later. By writing a letter to scheme administrators, in many cases, investors can control when a particular input period ends. This can allow for two large contributions to be paid within one tax year which exceed the annual allowance for that tax year in total. "For high earners, careful selection of pension input periods can allow contributions well in excess of the annual allowance to be paid in a single tax year and enjoy full tax relief," says John Moret, an adviser with Suffolk Life. "This is a quirk of the legislation and can be useful where an individual has exceptionally high earnings in one year perhaps as a result of bonuses. Clearly it is only really of value to individuals in that fortunate position." Investors who are considering taking full advantage of pension allowances in the coming weeks should be a bit cautious. There are risks. It is particularly important for advisers to deal with arrangements in a timely manner in order to satisfy HM Revenue & Custom's requirements. If payments are made incorrectly and exceed the annual allowance, a tax charge of 40 per cent on the excess amount will be levied. "If you are going to do this you'd be advised to run it past both an accountant and a pension adviser before you proceed," says Tom McPhail, pension adviser with Hargreaves Lansdown, the UK financial advisers. "If you proceed with caution, I'd see no reason why you'd fall foul of the rules. But there is the potential for mistakes to be made and for them to have significant consequences." As it stands, some Sipp providers bar investors from changing pension input periods. Low-cost or internet Sipps, which are more "do-it-yourself" investments, are more likely to prohibit investors from doing so. To skirt the restrictions and contribute the maximum amount to their pensions, investors would have to resort to using two separate pension arrangements. "The biggest practical difficulty is scheme administrators that won't do it for one reason or another. I'm dealing with a client right now who is in a pension arrangement where the rules forbid us from changing input periods," complains Steve Potter, head of technical services at Tilney Private Wealth Management. "But in many cases, Sipp providers permit the practice of nominating the end of input periods." It is possible to invest as many as three pension contributions within a short period of time. But analysts warn that investors considering doing this must be sure their income will match their pension contributions in the following year for payments to receive full tax relief. For example, if an investor was to make a pension contribution of £245,000 as part of his input period for the 2009/2010 tax year, he must be certain he will earn £245,000 - the salary required to qualify - in that year. Another point to remember is that an investor who "manipulates" pension input periods for the purpose of making a series of consecutive contributions to his Sipp in the short-term, "uses up" his allowance. "It doesn't ultimately increase the amount you can put into a pension," explains McPhail of Hargreaves Lansdown. "You are using three years' worth of annual allowances in one go, which means you are going to have to stop sticking money into a pension for a couple of years. Advisors are encouraging clients to make as many pension contributions as possible in the short-term. Investing early permits both a significant amount of additional tax relief and the possibility of improved returns on investments, they say. But more cautious advisors are counselling investors to be careful about moving their pension savings into equities in the near term given the level of volatility in the markets. It is difficult to retrieve funds from Sipps given the restrictions the Revenue puts on withdrawals. To read the complete article click here.

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