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28/08/2009 - Who Needs A Rising Stock Market If They Have Access to Decent Financial Advice?

Who Needs A Rising Stock Market If They Have Access to Decent Financial Advice?

With interest rates at an all time low on deposits and with some share portfolios still nursing losses, one area increasing in popularity is the movement of existing share portfolios into Self Invested Personal Pensions (SIPPs).

Both SIPPs and Small Self Administered Schemes (SSAS) have the ability to receive personal contributions in the form of existing share portfolios.  In doing so, a guaranteed uplift in value of 40% is achieved for higher rate taxpayers thanks to the tax relief generated.

This is not a new strategy, as the legislation on in-specie contributions changed in April 2006.  However, the current economic climate is making the strategy increasingly popular, as the shares will technically be treated as a sale to the SIPP and therefore trigger the potential for capital gains tax (CGT) to become payable.

With a lot of share portfolios significantly down in value from the stock market highs seen before the onset of the credit crunch, the potential CGT payable will often be minimal, if anything at all, and nearly always outweighed by the 40% tax relief gained from the exercise.

The process for in-specie contributions is very simple.  The SIPP provider creates a legal debt to the value of the SIPP portfolio, share ownership is transferred from the client to the SIPP account.  The SIPP provider receives 20% tax relief on the grossed up amount of the in-specie share portfolio contribution and puts this contribution into the SIPP.

A further 20% of the grossed up contribution value is also then reclaimed via the self-assessment tax form.

Just as important as the tax relief generated is the fact that the share portfolio has been protected from future CGT in the pension wrapper, as all such gains will remain totally tax free.

Does all this sound too good to be true?  Once the share portfolio is transferred to the pension, it cannot be accessed until retirement benefits are taken.  For people aged 50+ this is not a problem, but anyone younger needs to fully understand that they have lost some flexibility in the short or medium term.

What is clear is this is a potentially powerful and extremely timely opportunity at a time when markets are arguably low and one which offers a guaranteed uplift in value, the mitigation or complete elimination of CGT both now and in the future as well as the potential to reduce the Inheritance Tax that will eventually be payable.

Graham Laverick

28 August 2009

The content expresses the views of the contributor and should not be construed as specific advice to individuals or as an enticement to invest in any of the strategies mentioned.

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