Despite the U-turn on investing in residential property, Sipps remain extremely popular, says Mike Morrison, pensions strategy manager at Winterthur Life
Since 6 April 2006 - A-Day - Sipps have received a massive amount of press coverage and now seem to be the vehicle of choice for professional advisers. Such enthusiasm had been widely anticipated when there was the possibility of investing in residential property, as well as so-called 'esoteric' options such as wine and antiques, and yet Sipps' popularity seems even to have survived the Chancellor's U-turn on those possibilities last December.
Although the first Sipp product was introduced around 1990, interest took some time to ignite and the market was slow to develop. Indeed, it was not until 2001 that there was a definitive list of investments (as set out in the accompanying table) that could be included within a Sipp.
It was in the run-up to A-Day that hysteria really started to build - one new set of investment rules and everything would be acceptable. Businesses geared themselves up for residential property - both UK and overseas - while wine, antiques, stamps and so forth were also promoted heavily.
Gordon Brown's U-turn on such investments on 5 December was a real bolt from the blue and it is only now, with the publication of the Finance Act 2006, that we have final clarification of what investments may or may not be held within a Sipp.
Consequently, Sipps cannot invest directly in residential property, although indirect investment in taxable property via "genuinely diverse commercial vehicles" may be possible and Reits - real estate investment trusts - may well make this easier.
Meanwhile, property listed by the Finance Act as not being residential includes: hotels, owned either wholly or in part, as long as they don't confer any rights for the individual member to stay there; dedicated children's homes; halls of residence (but not flats or houses) for students; hospitals or hospices; and a prison or similar establishment.
The paper also went on to confirm that Sipps cannot invest in "tangible movable property". This includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts and the tax charges for investing in these are penal.
Last up were unquoted shares and it now appears that, where a member's scheme holds shares in a company where the member has a controlling interest - that's 20% or more - any purchase of assets from within the company of in excess of £6,000 could mean the member is subject to an unauthorised payment tax charge of 40%.
Post-A-Day, it seems very little has changed, so why has the hype around Sipps remained so high? There are a number of reasons for this, not the least being the acronym "Sipp" is not the word "pension". Over the years, pensions have been tarnished by poor performance, scandals and an association with old age. So far the Sipp retains an aspirational appeal for clients - the phrase "self-invested" giving the image of control.
Next, with the facilities of unsecured pensions and alternatively secured pensions causing investment for what could be a long period of time, investment choice and flexibility become standard while, furthermore, Sipps may still offer extra planning opportunities.
While not what it could have been, there may be the need to buy commercial property, to make in specie contributions or even to take advantage of some of the opportunities still left open following the Finance Act - how about buying your own prison?
Finally, both advisers and investors seem to have a new view of investments. The fear of market value adjustments on with-profits funds and the search for investment performance mean choosing the range of funds from one provider is a thing of the past. It is now recognised that specific funds can come from different providers.
As such, the pension is the wrapper and must be flexible enough to be able to accept contents from a wide range of sources and to be able to change them. Recent research from Invesco Perpetual shows that, over a 20-year period, the return on IMA funds tends to be higher than those on ABI funds, which suggests open architecture gets results - and there are no other plans as openly architectural as Sipps.2001's "definitive" list of permitted Sipp investments
• Stocks and shares listed or dealt in on an Inland Revenue recognised stock exchange (including Aim but not Ofex).
• Futures and options, relating to stocks and shares, traded on a recognised futures exchange.
• Depositary interests.
• Units in an authorised unit trust scheme.
• Units in a unit trust scheme, which (a) is an unauthorised unit trust whose gains are not chargeable gains by virtue of section 100(2) of the Taxation of Chargeable Gains Act 1992 and (b) does not hold any freehold or leasehold interest in residential property other than that specified in this schedule.
• Eligible shares within the meaning of section 638(11) received by the self-invested personal pension scheme as contributions to the scheme.
• Shares in an open-ended investment company.
• Interests (however described) in a collective investment scheme that is either a recognised scheme or a designated scheme within the meaning of section 86 or 87 of the Financial Services Act 1986.
• Contracts or policies of insurance linked to insurance company managed funds, unit-linked funds or investment funds of an insurance company resident in the UK or authorised in accordance with Article 6 of the Council Directive 79/267 (First Council Directive on Direct Life Assurance).
• Traded endowment policies transacted with a person regulated by the Financial Services Authority.
• Deposits in any currency held in deposit accounts with any deposit-taker.
• A freehold or leasehold interest in commercial property (including land) where the interest is acquired from any person other than a member of the scheme or a person connected with him in circumstances in which regulation 9(3) applies.
• A freehold or leasehold interest in any residential property that is:
(a) property that is, or is to be, occupied by an employee, whether or not a member of the self-invested personal pension scheme or connected with a member of the scheme, who is not connected with his employer and is required as a condition of his employment to occupy the property, and
(b) property that is, or is to be, occupied by a person who is neither a member of the self-invested personal pension scheme nor connected with a member of the scheme in connection with the occupation by that person of business premises held as an investment by the scheme.
• Ground rents, rent charges, ground annuals, feu duties or other annual payments reserved in respect of, or charged on or issuing out of, property, except where the property concerned is occupied by a member of the scheme or a person connected with him.
Source: Personal Pension Schemes (Restriction on Discretion to Approve Permitted Investments) Regulations (SI 117/2001)
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