We recently reported on concerns that self-invested personal pensions (Sipps) investing in commercial property could risk a breach in their lifetime allowance. Here, London & Colonial’s Adam Wrench argues that different vehicles should be considered instead.
Commercial property has become a popular, increasingly common asset class, driven in part by strong yields and a fast-recovering UK property market. Indeed, such has been the performance of the sector over the past 12 months that some have argued that investors holding commercial property in Sipps might now be in danger of exceeding their lifetime allowance.
While commercial property remains a viable asset class and continues to attract strong interest, investors and their advisers need to consider whether Sipps are the best vehicle to manage this growth – particularly in the context of the lifetime allowance limit.
We urge advisers to consider a range of wrappers for their clients including qualifying non-UK pension schemes (Qnups) and qualifying recognised overseas pension schemes (Qrops). With the April 2014 planned reduction in lifetime allowance to £1.25m, time is of the essence.
Apart from Qrops being specifically designed for those currently resident or eventually seeking to reside abroad, it can also help to mitigate any further tests against the lifetime allowance. By transferring an existing UK pension pot into a Qrops, while it is tested against the lifetime allowance on transfer there are no further tests against the lifetime allowance.
Qrops were first introduced in 2006 in an effort to tackle the retirement needs of those residing abroad and have played a pivotal role ever since. A Qrops will allow anyone with a UK-registered pension, who is either currently residing outside of the UK or is intending to do so in the future, to transfer their pension pot abroad while benefiting from a raft of taxation benefits.
By ensuring that any transferred amount is equal to or less than the lifetime allowance, no lifetime allowance tax charges are currently incurred and the Qrops fund would be effectively ringfenced from any future lifetime allowance taxation charges – regardless of the amount by which the fund may increase in value over the years following the transfer.
Furthermore, any future growth, over and above the amount originally transferred, would also remain exempt from the 55 per cent lump sum death benefit tax charge normally applicable upon death within a UK-registered pension scheme.
In addition, for those clients who have been non-UK resident for more than five consecutive tax years prior to death, no UK unauthorised payments tax charge will normally apply, meaning that any remaining funds on death can be paid out in full to the client’s beneficiaries.
This compares favourably to the automatic 55 per cent tax charge that would have been payable had the funds remained within a UK scheme, as well as a potential unauthorised tax payments charge levied against any funds that may have exceeded the current lifetime allowance limit applicable at the time.
The benefits of using Qrops in this way must be weighed up with whether the vehicle is appropriate for the client’s circumstances.
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