From 6th April 2006 the SIPP will replace all other types of personal pension in the UK. Basically the government’s aim is to simplify the pension system in the hope that more people will invest in pensions (and thereby relieve the government its obligation to provide for an ageing population). For the first time you will be entitled to own an overseas residential property as part of your pension. This makes the SIPP of real interest to many British people who either own property or those who are looking to purchase property in Spain owing to the substantial tax relief which is on offer.

Distinguishing Features:
The majority of the complicated restrictions which currently surround pensions are removed. The limits as to the amount you can invest each year have virtually disappeared and the SIPP is compatible with having a company pension as well. You choose where you wish to place your investments and there is no requirement to purchase an annuity at 75 years of age.

Tax Position:
Contributions made to your SIPP will remain tax deductible and any income generated will generally be free of UK tax. In the case of property this is likely to apply most of all to rent generated. UK Capital Gains Tax will not be charged upon any assets in the pension fund and, perhaps most significantly of all, assets in the fund will pass free of UK inheritance tax. In order to ensure that the full tax benefit is obtained it is essential to ensure that the most appropriate ownership structure is used to purchase the property.

How do I get money into my SIPP so that it can buy property?
Firstly, you can transfer the contents of your existing underperforming pension funds into the SIPP. This is generally straightforward but can take 3 or 4 months to accomplish. Before you decide to do this, you must get proper independent financial advice from a specially qualified ‘pensions’ IFA. I can introduce you to one, and will not receive a payment for doing so.
Secondly, you can make direct contributions into the fund. The rule is basically simple. You can pay into your pension fund a maximum of your taxable earnings or £215,000 per year, whichever is the greater. For those who have no earnings, the limit is £3,600 per year. You can make contributions up to a lifetime total of £1,500,000. Both the £215,000 figure and the £1,500,000 will be revised from time to time. They will each increase annually until at least 2011. The details are a bit more complicated, and, once again, you will need good financial advice to make the best of the system.
Thirdly, you can transfer into the name of your fund the ownership of assets up to the value that you would be allowed to put in in cash. Doing this requires careful legal and financial advice.

What if I haven't got enough money to buy the property I want?
Your pension fund can borrow. It can borrow a maximum of 50% of the value of the pension fund. Thus, for example, if you had a pension fund of £200,000 you would be able to borrow an additional £100,000 and you could use all or part of that £300,000 total to invest in your international property.
If you still do not have enough money to buy the property you want, then you can buy a part share in the property. Your fellow owner could be you in your personal capacity, your partner or children in their personal capacity, or any other person or company. It could also be another pension fund so, for example, if you and your partner both have SIPPs, you could buy a property that belonged to them both.

What happens when I retire?
There are a number of options. You will need to discuss these with your Financial Advisor. Basically, however, you can either sell the assets in the fund and buy an annuity or keep certain classes of assets – including real estate generating rental income – and use that income to pay your ongoing pension.
You will have much more freedom to decide how much pension you wish to draw from the fund. In most cases, you will be able to draw anything from 0% of the income generated by the fund to 120% of that income. Again you will need financial advice.

What happens when I die?
Because of the way the rules operate, there should always be some money left in your fund when you die. For some people, there could be a lot of money in the fund. In future, you will be able leave that fund to your chosen heirs. They will not receive the cash, but they will receive the value of the fund (i.e. the cash value realised by all of the investments, including real property, in that fund) paid into their pension fund. Once again you will need detailed financial advice to structure your affairs to take advantage of this opportunity.

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Information courtesy of Marc White LL.B. (English Solicitor) - Visit homepage

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