Date of issue: 9th August 2005

TAKING ADVANTAGE OF THE NEW PENSION RULES

The Government's recognition of the crisis in pension funding in the UK has resulted in a radical overhaul of the legislation, one of the key developments being that individuals now have the opportunity to become more involved in the management of their fund.

While the widening of the classes of investment that can be held should encourage people to
save through a pension fund, a specialist in personal taxation has suggested that many people do not realise the huge potential they have to maximise their investments under the new regime.

"Pension schemes should be an integral part of a family's wealth management and the tax reliefs available under the new rules are generous, the transitional arrangements are extremely complicated, with nasty traps if inappropriate steps are taken, so we all need to review our affairs and take action now to ensure we derive the maximum benefit from the new arrangements," says Shona Cutler, a partner with chartered accountants Clement Keys, Birmingham.

One set of rules governing all types of pension schemes will simplify matters, while it will still be possible to take a tax free in lump sum up to 25% of the value of the fund. A further advantage of the new pension system is that there will be no mandatory requirement to purchase an annuity at the age of 75. The capital value of the fund is therefore preserved and can be passed to a beneficiary on death, although a charge of 35% will be incurred on the transfer of the fund's assets to a third party.

The ability to invest in a much wider class of investments, such as residential property in the UK and overseas, is expected to prove a major attraction for some people, especially those who are considering consolidating their investments under the umbrella of a Self Invested Pension Plan.

Provided by regulated bodies such as banks and insurance companies, SIPPs enable an investor to take an active part in the management of their capital.

It may be worthwhile holding holiday homes or buy to let accommodation or property in a SIPP, as the rental income received will be tax free along with any capital gains. The ability to put assets into a SIPP and free up cash locked up in insurance company pension schemes can also prove useful.

However, Shona says the performance of the insurance company pension scheme, the market value adjusters and the transfer values should be considered carefully before investors transfer the value of their pension fund into a SIPP, and she urges caution over the choice of fund administrator.

"While SIPPs are regulated in as much as the fund is administered under the umbrella SIPP provider's scheme rules, I am concerned that there appears to be very little formal control governing the appointment of trustees and investment advisers," she says.

Under the new pension regime the value of an individual's fund is limited to £1.5m, so anyone with a fund valued near that sum should seek specialist advice urgently in order to preserve the value of their accumulated assets and avoid sizeable tax charges. Shona says final salary schemes need to be watched carefully as they tend to have very high notional fund values, and she stresses that the onus is on the fund holder, not the scheme administrator, to apply for Primary or Enhanced Protection.

Anomalies in the new system and the raising of the retirement age to 55 from 6 April 2010 means that in some instances it will be advantageous for investors to take benefits under the old pension rules. Shona therefore advises investors to review their position in consultation with a professional adviser before taking any decisions which could impact on the rewards they will be able to take under the new pension regime.