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UK Tax Relief Changes To Hit Pension Contributions

Monday, October 17, 2011

Self Invested Pension Plans (SIPPs) and Small Self Administered Schemes (SSASs) will see their fund flow reduced as a result of reductions in tax relief, new research has revealed.

The research, carried out by Investec Bank, is based on a survey of 100 independent financial advisers (IFAs) across the UK. It shows that almost two thirds of IFAs predict that changes to the tax relief system will negatively impact contributions into SIPPs and SSASs. In addition, since new legislation was introduced in April, around three quarters of IFAs surveyed have seen no change in the volume of SIPP/SSAS business, while a fifth of pension focused IFAs have seen an increase in this type of business. Of those IFAs to have seen an increase in business, 30% said that it has increased by more than 20%, with one in ten seeing an increase of more than 30%.

Earlier this year new legislation was introduced changing some of the rules around tax relief on SIPPs and other wrappers. As Investec explains, for the current tax year 2011/12 the level of contributions on which personal tax relief is granted is up to 100% of UK earnings (from employment or self employment), subject to an overall limit of GBP50,000 (USD78,870), down from the previous limit of GBP255,000. This change also meant a drop in the lifetime allowance from GBP1.8m to GBP1.5m.

Investec has argued that part of the reason for the increased demand in SIPP and SSAS investments is investors’ desire for greater control over their pension investments. At the same time, it is noted, more IFAs are using wrap platform technology to offer their clients access to a broader range of funds and managers across a range of sectors.

Those IFAs surveyed said that their clients have on average almost 10% of their SIPP/SSAS assets held as cash deposits, equating to some GBP37,800. However, Investec has warned that many investors are losing out on higher returns because the cash element of their SIPP or SSAS is held in a deposit account paying a poor rate of return.

Lionel Ross, speaking on behalf of Invested, commented: “Investors appear to be looking at SIPP and SSAS wrappers as an effective way to manage their pension investments in a low base rate environment and while equities remain volatile. More wrappers are migrating on to the UK wrap platform market, offering an even wider range of assets...Cash continues to play an important role in any SIPP or SSAS portfolio; whether that role is to ride out turbulent markets or achieve greater flexibility but investors ensure their cash is held in an account offering a fair rate of interest.”

Robert Graves, Head of Pensions Technical Services, Rowanmoor Pensions, added, “The fact that SIPP and SSAS volumes have continued to increase despite recent rule changes is testament to the added value strengths of these products. However, part of the success story is that these products are used by those who have already built up pension funds through making tax-advantaged contributions in the past. New generations need incentives, such as the current tax relief available, to save for retirement too. Therefore it is not surprising many IFAs expressed concern that reducing tax relief would be detrimental.”

“Investment flexibility, particularly in turbulent investment times, is important. Those who wish to avoid the current volatility witnessed in some markets may seek the relatively safe harbour of cash deposits. With this research indicating that an average of 10% of assets in SIPPs and SSASs being held as cash, it is important that IFAs use SIPP and SSAS products that can readily facilitate the use of competitive cash deposit accounts”, Graves concluded.