Providing for retirement requires funds to be available for investment. Where times are hard financially it may still be possible to start or maintain pension funding.
HMRC guidance confirms that contributions to a registered pension scheme must be a monetary amount. However, it is possible for an individual, or employer, to agree to pay a monetary contribution and then to settle this debt by means of the transfer of an asset or assets.
This cannot be done by merely saying 'take this asset and whatever it is worth that is the contribution'. There is a clear obligation on the member/employer to pay a contribution of the specified monetary amount. If the market value of the asset, at the time the trustees of the scheme take ownership, is lower than the contribution the shortfall needs to be met.
Advantages of making in-specie contributions:
• Contributions can be made where funds are not readily available.
• Getting an asset into the pension scheme where there are insufficient scheme funds or insufficient liquidity to proceed with the purchase.
• Where tax relief on contributions is received through the relief at source method the asset generates liquidity by way of the basic rate tax relief that is credited to an individual's pension fund by the scheme administrator.
• The asset once it is in the scheme is in a tax advantageous environment.
However, the following should be borne in mind:
• The annual allowance. However it may be possible to increase this limit by using any unused annual allowance from the previous three tax years.
• The creation of an irrevocable debt i.e. the commitment to make a contribution of the pre-agreed monetary value
• Once the asset is in the pension scheme it cannot be offered as security by the previous owner in connection with a financial transaction.
Where the pension provider allows co-ownership of assets it is possible to move an asset into the scheme in stages. This could be useful where the level of contribution needs to be kept below a certain limit e.g. the annual allowance. This may also help mitigate capital gains tax on the sale of the asset to meet the debt created by the requirement to make the contribution. Moving a commercial property into the scheme in stages may have possible stamp duty land tax savings but this is dependent on the stages not being treated as linked transactions.
It may be possible to use an asset with a charge over it e.g. a commercial property with a mortgage. Where there is equity in the property the pension scheme borrows, up to a maximum of 50% of the net pension fund value, to buy part of the property, and assuming the funds released from the pension scheme are sufficient, the mortgage is repaid.
In effect the pension scheme takes on a mortgage on the property. The remaining part of the property not owned by the pension scheme, which is mortgage free, is now able to be used to settle the debt created by the commitment to make the contribution.
Another issue arises where the asset being used is subject to value added tax (VAT). As the pension scheme is taking ownership of the asset the VAT is a liability for the scheme. Where possible, taking steps to allow the pension scheme to reclaim the VAT may be beneficial for the individual member.
The payment of an individual pension contribution reduces the "adjusted net income" of the individual. Such a reduction might be advantageous - the reinstatement of the personal allowance, a reduction in the child benefit income tax charge - generating more tax relief through the contribution.
In terms of retirement planning the tax breaks available through pension funding should never be understated. Administering this type of contribution places additional demands on pension providers e.g. pursuing debts created by the shortfall in the value of assets, meaning some providers choose not to offer this facility.
The opportunity to make in-specie contributions should not be overlooked by advisers. Before enquiring as to whether in-specie contributions is an option under a pension arrangement, advisers should fully understand the consequences of taking clients down this route.
Neil MacGillivray is head of technical support at James Hay Partnership
Prudential head of business development Vince Smith-Hughes discusses the consequences of pensions freedom and changes to death benefits