Are you wanting to boost your pension savings but hesitating because of the costs? Or maybe you can’t go ahead because you don’t have the ready cash?
There is an alternative solution for growing your retirement nest-egg without the need to inject hard cash – in fact it could even put money back in your pocket. Technically it’s called “bed-and-pensioning” or, more specifically, “bed-and-Sipping” (Sipp stands for Self-Invested Personal Pension).
In simple terms, it means switching investments you have outside your pension into the tax-efficient wrapper of a pension, making use of the the generous income tax reliefs on the way. It could be helpful for those looking to play pensions “catch-up” or for people wanting to build up funds now to invest in residential property or any of the eligible alternative assets when the pensions rules are relaxed next April.
One of the major attractions is that your pension fund gains an additional boost thanks to upfront tax relief (subject to investors being within their pension contribution limits). For a higher-rate taxpayer, this effectively turns a £60 contribution into £100.
The flipside is that you are tying up assets in a pension which cannot be accessed until you reach retirement and, unlike an individual savings account, will be subject to tax when you start drawing an income. Technically, too, you can’t just move an investment into a pension: you have to sell it and buy it back through the pension plan.
But if you are still interested, Sipps represent one of the best ways to do this. Their wide investment freedoms mean they are the most likely vehicle capable of mirroring the investment strategy achieved by assets outside a pension wrapper. And, under the proposed rules coming in next April, you will be able to hold a wide range of assets in your pension from stamps and wine through to antiques and classic cars.
You don’t need to keep the same investment, but doing so avoids the risk of selling an existing asset at a low point and reinvesting the proceeds in another more highly-valued asset. Adopting such a strategy also means that the timing of a so-called “bed and Sipp” eliminates any concerns over whether now is good time to be investing more money.
“[Bed-and-Sipping] divorces tax and pension planning from portfolio planning – it is a good example of tax not driving investment decisions,” says Mike Warburton, senior tax partner at accountants Grant Thornton.
However selling and buying back assets creates the risk of the price moving against you during the period you are out of the market. There are also dealing costs to consider. To avoid the risks of being out of the market you can pre-fund the pension with cash and then sell your investments while simultaneously buying them through the pension.
There are services that can be useful in minimising these bed-and-Sipping pricing risks as well as the costs. (See box).
Hargreaves Lansdown’s Sipp allows investors to buy and sell at exactly the same price with many popular investment funds – those funds that are single-priced and where Hargreaves fully discounts the initial charge. For funds which carry a dealing spread and where Hargreaves levies part of the initial charge, investors could lose up to 2 per cent on a simultaneous buy-sell.
“Limit order” facilities available from many online brokers can also be used to squeeze out costs. Investors commit to automatically selling (or buying) at a fixed price – should the market achieve that level.
For example, investors could use Alliance Trust’s low-cost Sipp to buy an existing investment trust holding through the pension then set up an automated “limit order” to sell it through an online broker at a price that would cancel out all spreads and dealing costs. The risk is that the price never meets the limit order level.