Self-invested pensions, a user's guide

Robert is a partner in a big firm of City accountants, and is due to retire shortly. He is setting up a farming enterprise close to his home and wished to buy some agricultural land. As a result we decided to kill two birds with one stone, and set up a self-invested pension plan (Sipp), in considerable haste, to catch the end of the tax year.

Unlike conventional pension plans, Sipps can invest in commercial property and farm land. The payment for the agricultural land was made into the Sipp and thus the purchase price became the premium and obtained tax relief.

This represents a substantial benefit to Robert now, while he is a top- rate taxpayer as his income is likely to drop from his current 40 per cent tax rate to 24 per cent.

We spent a lot of time comparing the merits of contributing to a pension or investing in a Personal Equity Plan. I believe that generally PEPs represent better value than additional voluntary contributions to a pension plan (AVCs), especially if the time to retirement is short.

However, the situation changes when personal pensions are in the ring because of the opportunity to take 25 per cent of the pension as a tax- free cash sum on retirement, and the opportunity to use the balance for income withdrawal rather than having to buy an annuity immediately on retirement. Pensions show up even better when there is likely to be a fall in tax rates in retirement.

The second call was from a friend of another client who wished to buy his business premises from a receiver. Unfortunately he has a small Self- Administered Pension Scheme. Had he been in a personal pension instead he too would have been able to make use of carry-forward and been able to purchase the building in his Sipp fund and obtain tax relief on the contribution.

The third client, Rose, is the god-daughter of another client of mine. Her flat is above a shop and the shop was put up for sale in an auction. The shop failed to reach its reserve price of pounds 24,500 and she was able to buy it post-auction at a substantial discount to the reserve.

The question was whether it would be better to buy the shop through a Sipp or in her own name. The reason for wishing to buy the shop was to protect the value of the flat and to ensure that the premises would not be used for a restaurant or takeaway.

Because Rose did not have enough capital, a loan of two-thirds of the purchase price was arranged. The advantage of purchase through a Sipp would be that tax relief would be obtained on the cash contribution towards the purchase price ( ie one third). Because a loan was required to purchase the shop, the loan interest would also be tax-deductible because it would be paid as a pension contribution. As Rose is a 40 per cent taxpayer and does not make full pension contributions, this advantage in effect reduced the risk if it proved difficult to let.

However, there was pressure to exchange quickly, because the landlord had found someone to rent the shop and because the costs of setting up a Sipp for a small purchase seemed too high, the decision was made to buy the shop in Rose's own name.

The shop was being sold as a freehold, with a lease on Rose's flat. It would therefore have been necessary to split the deeds of the flat away from the shop if the shop had been bought through a Sipp, because it is not possible to purchase residential property in any form in a personal pension.

Allowable assets

Cash

Unit trusts

Investment trusts

Shares

Warrants

Commercial property

Agricultural land

Non-allowable assets

Connected transfers

Residential property

Private company shares

Overseas assets - problems of control.

Michael Royde is an independent financial adviser and can be contacted on 0171-792 3700