Stephen McPhillips, Technical Sales Director, Dentons Pension Management Limited, answers some of the most common questions around less liquid assets held in a SIPP/SSAS in the light of the government’s proposal to bring pensions back within the scope of IHT.
In my previous article for Professional Paraplanner, I outlined some of the considerations (including liquidity) arising from the proposals to bring most defined contribution (DC) pensions within scope of Inheritance Tax (IHT) from 6 April 2027, meaning that pension scheme death benefits may be subject to an IHT charge.
In this article, I will highlight, through a series of questions and answers, why self invested pensions continue to offer a flexible retirement planning solution for clients – even where some assets might be considered to be less liquid than others.
However, please bear in mind that the IHT proposals are still simply that at this stage – proposals – and a lot could change as a result of the consultation process undertaken by HMRC.
Please also bear in mind that payments of pension death benefits to a spouse or civil partner will be exempt from IHT from April 2027 under the current proposals.
Question: Should my clients be careful to hold cash or near-cash investments (such as a portfolio of collectives and so on) within their self invested pension scheme in the lead up to April 2027, given that the scheme might have to pay its share of an IHT liability from then?
Answer: Given that IHT will only come into play in the event of a client’s death, the answer to this question will depend on the client’s health position, the intended beneficiary and whether or not there will be an IHT liability on their whole estate including the pension scheme.
If there will be an IHT liability impacting the pension scheme, it would be prudent to ensure that some liquidity exists within the scheme where the client believes that their life expectancy is relatively short. This would enable the pension provider to settle the scheme’s share of the IHT liability prior to paying the death benefits to nominated beneficiaries (as is required under the terms of the consultation). Other, less liquid investments (such as commercial property), could continue to be held to generate rental income and capital appreciation for beneficiary drawdown payments.
Question: What if my client’s SIPP/SSAS owns commercial property currently; should they think about selling it prior to April 2027 so that there is liquid cash to draw out of the scheme as pension commencement lump sum (PCLS) and/or flexi-access drawdown payments which can then be used to make gifts utilising the Normal Expenditure Out of Income Exemption?
Answer: Clearly, the client must have reached their normal minimum pension age (NMPA) in order to draw retirement benefits from their scheme. Readers will know that the NMPA will rise from age 55 to age 57 from 6 April 2028.
Also, drawing any pension income from the scheme will result in taxation at the client’s marginal rate of tax and so it is unlikely that it would be in every client’s interest to strip as much income out of the scheme as quickly as they can in their lifetime.
It follows, therefore, that a balance could be struck between holding less liquid investments within the scheme alongside more liquid ones.
Example: SIPP owns an unencumbered commercial property valued at £350,000.
Rental income from the property is £24,500 per annum, which client draws as flexi-access drawdown payments.
Other scheme assets are a cash at bank of £15,000 and a platform portfolio of collectives valued at £200,000.
On the member’s death post 6 April 2027, assuming that an IHT liability attaches to the SIPP, liquidity is required to pay the IHT bill prior to the payment of death benefits to beneficiaries.
If the SIPP’s share of the IHT bill is £215,000 or less, this can be met by the sell-down of the collectives portfolio and the cash held in the SIPP bank account.
This would leave a commercial property worth £350,000 generating £24,500 per annum (7% return).
Options:
1. the property could be sold to create cash to make lump sum payment(s) to beneficiaries;
2. funds could be borrowed from a lender in order to create liquidity for death benefit payments – loan repayments would come from rental income payments;
3. the property could be retained within the pension environment (indefinitely) under a beneficiary drawdown arrangement for income payments to nominees/successors – producing a 7% per annum return along with potential capital appreciation (and no Capital Gains Tax liability on any capital growth).
Question: Why would a client want to hold relatively illiquid investments in a pension scheme, taking into account the IHT proposals?
Answer: The underlying reasons for holding assets such as commercial property within self invested pensions have not changed as a result of the Autumn 2024 Budget. These reasons can include, but are not limited to, attractive yields, long-term capital appreciation, portfolio diversification and so on. Commercial property ownership, for example, within SIPP and SSAS is a hugely popular choice for many clients and it will continue to be so. The Budget proposals merely require some thought about how any IHT liability which might attach to the scheme is actually paid. This is no different to the questions around how IHT will be paid in relation to DC death benefit payments like dependant’s annuity, nominee’s annuity and so on.
In addition, the position on illiquid assets is no different outside of the client’s pension assets where the bulk of the client’s wealth might be represented by bricks and mortar.
Question: Is it worth transferring a commercial property in-specie from one provider to another in light of the Budget proposals?
Answer: Given the strong reasons for continuing to hold commercial property in a SIPP outlined above, it follows that it still makes sense to transfer in-specie (in bricks and mortar form) from one SIPP provider to another where the current SIPP provider is underperforming in terms of service, has increased its charges, places onerous requirements on its property clients, has gone into liquidation and so on. There is no Stamp Duty Land Tax (SDLT)/Land and Buildings Transaction Tax (LBTT) in Scotland payable on the transfer and the legal work involved is often far more cost effective than a purchase would be. In addition, providers may from time to time offer attractive discounts on their normal charges for such in-specie transfers.
Of course, if desired, a commercial property could be sold at any time – either to a connected party (subject to a RICS Registered Valuer’s open market capital valuation) or on the open market.
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