QUEUEING UP behind the Hunting Bill in Parliament are the Pensions Act and the Finance Act, which, with associated regulations, will bring some potentially valuable changes for farming businesses in the way pensions are invested and administered.
Under the new rules, expected to become law before the end of the year, investors will be able to accumulate a pension fund of up to 1.5m and take up to 25% of it out as a tax-free cash lump sum. The rest must be converted into an annual income by buying an annuity.
While this is not a big change for personal pensions, it brings occupational pension rules into line with them, says Shelagh Hamer, pension specialist at NFU Mutual.
An annuity is an annual retirement income, the size of which is based on the size of the fund available to buy it and the health and age of the person seeking the retirement income. The company providing the annuity offers an annual amount according to its view of the life expectancy of the individual concerned.
One of the risks with an annuity is that an investor can hand over his or her accumulated pension fund one day in exchange for an annuity and die soon after. In some cases this would mean there would be no further payment in consideration of the lump sum invested in return for the annuity.
But there are ways to protect the payment of annuities, including options to buy a spouse”s annuity alongside the main one, or to guarantee payment for a minimum of five or 10 years, says Ms Hamer.
Because annuity rates have been low for several years, an arrangement called drawdown has been in place for some time. This can be used to take a cash sum from a pension fund as income, allowing the decision on annuity purchase to be deferred.
In an extension of this, the rules governing the date by which an annuity must be bought are also being relaxed as part of the change. In the past, a retired person was forced to buy his or her annuity by age 75, but in future there will be no upper limit and draw down may continue indefinitely, subject to regular review, until the fund is exhausted.
As part of this greater freedom for the pension investor, it will also be possible to invest in residential property (previously excluded) through a Self Invested Personal Pension (SIPP).
“The benefit of this is that a family can run a group scheme and when a member dies, the property in the pension fund can be passed down to other family members rather than, as has often been the case in the past, the accumulated fund being lost or paid in a prescribed form.
“For example, a farming family group pension fund could invest in the farmhouse. Those living in it would then have to pay a market rent to the pension fund, or be charged an income tax benefit on the value of that accommodation. But a total investment of, say, 200,000 would attract tax relief worth 44,000 immediately, and a further 50% of the fund or 122,000 could be borrowed. So, although it may not be wise to concentrate one”s investments in such a way, theoretically property worth 366,000 could be purchased.”
There are still tax reliefs for pension contributions and while these are most relevant if the business is making enough profit for its owners to be paying higher rate tax, they can still be claimed to a limited extent by those in a loss-making situation, says Ms Hamer.
“This is because they still have the ability to base contributions on previous years” earnings or pay 3600 gross regardless of income.”
Too many farmers and their spouses have failed to make any private pension provision, and have missed out on many means-tested benefits because they are asset rich. The fact that they may be cash poor does not count for anything in the state system of assessing entitlement to benefits, says Ms Hamer.
This often leaves their successors feeling obliged to provide in some way through the farm business for the retired generation, but with cash short, this is difficult to do.
“One option is for some of this cash support to be paid back” using life cover for the older members so that a lump sum is provided on their death, payable to those who have cared or provided for them in retirement. But this can also be difficult to get, or expensive if they are very aged or in case of illness.”
Stakeholder pensions are still a very flexible and low cost way to invest in a pension, provided you choose a pension provider which sticks to the CAT rules on costs, says Ms Hamer. But they have not been as successful as the government had hoped.
For every 78 invested in a stakeholder pension by an individual, the tax relief available means that 100 will be invested in the fund. Higher rate taxpayers can claim the extra tax relief through their tax return. For the next two years it is possible to base contributions on any of the five previous years when a taxpayer may have had significant earnings, thus enabling him or her to boost contributions if they have the cash to do so.
Apart from the lack of farming profits in recent years, there are many other reasons for a reluctance to invest in pensions, including well-publicised pensions disasters, and a general reluctance to plan for the future. Some who are wary of pensions as an investment have chosen to invest in buy-to-let or other property instead, says Ms Hamer.
WARY OF PENSIONS
For those who do not have a large sum or who are wary of pensions, she suggests considering ISAs. “Although you do not get tax relief to go into an ISA as you do with a personal pension, the lump sum grows virtually tax free and is tax free at the end.