Making retirement provision for the whole family

Julian Barrow of Charlwood Leigh looks at family pensions.

Most pension arrangements (other than defined benefit/final salary schemes, which are becoming increasingly rare), whether operated by an employer or an individual, are similar. However, recent changes present opportunities for more innovative retirement investors.

One such solution is the Family SIPP (self-invested personal pension) which takes advantage of the greater flexibility allowed under the new rules.

How does the Family SIPP work?

Every individual has the right to build a pension fund up to a Lifetime Allowance (£1.8m for the 2011/12 tax year). Maximum pension contributions can now be paid much less rapidly than before – up to £50,000 for 2011/12, of which the individual can contribute personally up to 100% of their earnings and qualify for tax relief, perhaps even up to 50% for higher earners.

Under the new pension rules, the involvement of an employer is no longer necessary within the provision of group retirement planning. This means that families and groups of connected or like-minded individuals can get together as an ‘extended family’ and combine their collective lifetime allowances into one pooled pension fund for the purposes of investment. The pooled pension fund can be tailor-made to fall within the specific requirements of HMRC rules (which are widely drawn), providing opportunities normally out of the reach of an individual SIPP investor.

What are the advantages of the family SIPP?

Scale
Families and ‘extended families’ can join together in a single pension arrangement and make ‘bulky’ investments, such as commercial property.They can also negotiate services such as discretionary fund management on competitive terms.

Flexibility
The Family SIPP offers a full range of options to maximise planning opportunities at retirement, including conventional and investment-linked annuities, unsecured pensions and scheme pensions. Few pension schemes can offer this range of options under one roof.

Tax efficiency
The Government seems to be committed to penal taxation on residual pension funds where death occurs after age 75 and pensions have been provided after that date on an unsecured basis, i.e. if an annuity has not been purchased by age 75. The Family SIPP will not only facilitate higher pensions after the age of 75 than those available on an unsecured basis, but payments can be guaranteed for ten years – potentially minimising the tax liability on death.

Commercial property investments
Partners and the self-employed have the opportunity to purchase commercial premises let on arm’s length terms to the business by the Family SIPP. This facility was previously denied to the selfemployed, but very successfully utilised by directors of small private companies since the 1970s.

Succession planning
A pooled pension fund can be of great help to firms for business succession planning, facilitating the exit of retiring partners and introducing new partners.

Who is likely to benefit from the family SIPP?

Families
For example, a husband and wife with three grown-up children can participate in one pension arrangement and target a combined maximum investment fund, currently of £9.0m. Minors, including grandchildren, can also participate, as can brothers and sisters or other more distant relatives if desired.

Business partners and the self-employed
For the first time, business partners and the self-employed can benefit from self-investment opportunities on similar terms to those that have long been available to directors of small private companies. This is particularly suited to professional firms such as lawyers, accountants or surveyors and to groups of self-employed professionals such as dentists and barristers who can join together to take advantage of this flexibility.

Groups of like-minded individuals
Those with a common investment purpose can combine to make investments that would otherwise not be available to them individually on a cost-effective basis.