Actuary AJ Bell has sounded a warning about proposals in the Finance Bill on gearing levels for SIPPs once the new pensions regime starts on A-Day April 2006.
New gearing limits could affect SIPP members negatively compared with existing borrowing limits, as wording in Clause 171 of the Bill is causing confusion as to its interpretation.
”There are two issues here,” says AJ Bell managing director Andy Bell.
”One is the reduced borrowing ability that hits SIPPs. The other is a technical issue relating to the framing of the rules.”
Currently, SIPPs can borrow up to 75% to acquire property, and borrow an additional amount over the short term equal to 100% of any VAT applied.
This means a SIPP with £25,000 in cash can borrow up to £75,000 to buy a property worth £100,000, plus borrow an additional £17,500 to cover any VAT – although the VAT issue is “neutral” in that it can be claimed back, Bell says.
Clause 171 implies SIPPs can only gear up to 50% - below the current gearing limit - although confusion over the wording means there is debate over the meaning of the clause because of reference to “gross assets”.
Gearing limited to 50% of gross assets would imply somebody buying a house for £150,000 (£100,000 of SIPP cash plus £50,000 of borrowed money) would actually be able to borrow another £25,000 (£50,000 plus £25,000 equals £75,000, which is half of £150,000, the value of gross assets post-purchase).
Comments attributed to Treasury secretary Ruth Kelly, suggest a SIPP with £100,000 in cash could borrow another £100,000 to acquire a property worth £200,000, says Bell.
This “is different to what the Finance Bill currently says,” Bell adds.
A better definition of gearing in the new rules would be a limit of “100% of net assets”, Bell says.
Bell feels government fixation on gearing actually misses the point of the lifetime limit under the new regime.
The £1.5m limit means it should not matter whether pension savings grow through tax relieved contributions or geared up investments, he argues.IFAonline
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