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Newsletter issue - December 08.
The recent downturn in world stock markets has reduced the value of many pension funds. If you are nearing your expected retirement date you may well want to boost the value of your pension fund for it to have sufficient future income to pay out the required level of pension.
One way to boost your pension fund is to liquidate some of your personal investments and pay the proceeds into your pension scheme. If your investments are worth less than their cost price you will make a loss on the sale, but this loss will be available for you to use in the future to reduce the taxable amount of your future capital gains. If you make a gain on selling your investments that gain will be taxable, but you can set your annual exemption of £9,600 against your total of your gains before the balance is subject to capital gains tax at 18%. The contribution you make into your pension fund will also attract tax relief at your highest rate of tax. If you pay tax at 40%, half of the tax relief is reclaimed by the pension fund and the remaining 20% by you. This tax relief could help you recoup the losses on your investments.
If you have a self invested pension scheme (SIPP) you can transfer your investments directly into the pension fund, with the agreement of the fund administrators. This sort of contribution is called an in-specie contribution. The transfer to the SIPP is still treated as a disposal by you at market value, so a gain could arise although you will have no actual proceeds. If the gain is less than your annual exemption no capital gains tax will be payable. The advantage of transferring investments to your SIPP is that you can claim tax relief at 20% on the market value of the assets transferred, and the investment remains under your control in your SIPP.
The following types of investments may be transferred as in-specie contributions into a pension fund:
- Commercial property in the UK or located overseas;
- Hotels, guest houses and nursing homes;
- Riding stables and golf courses;
- Forestry, woodland and agricultural land;
- Non-income producing land;
- Shares in unrelated companies, including;
- VCT shares
- EIS shares
- Shares acquired from employee share schemes
- Shares in Real Estate Investment Trusts (REITS)
The shares do not have to be quoted on a stock market, but unquoted shares must be valued on a fair market basis before the transfer. Some of the above investments may be held by your own company, in which case the company could make an in-specie pension contribution as your employer.
The value of the total contribution should not exceed the tax free annual allowance for the year, which is currently £235,000. Please seek advice before making a transfer of any investment, as there are detailed regulations to abide by in each case.
