Beat the carry forward deadline using an in-specie pension contribution
For clients looking to beat the reduction in annual allowance but who don’t have the cash, an in-specie pension contribution is an option, says Claire Trott, head of Pensions Technical, Talbot and Muir
The reduction in the annual allowance for high earners next year has led to an increased interest in higher contributions this year to use up carry forward before it is lost. However, many do not actually have the cash to pay the contributions but this isn’t a problem if they have other assets, they can pay an in-specie contribution. Paying an in-specie contribution may sound simple but there are a number of issues to consider and hoops to jump through to achieve what the client wants to achieve.
Technically there really isn’t such a thing as an in-specie contribution; all contributions must be expressed as a monetary amount so it is necessary to start the process with a figure in mind and make it clear to the provider the contribution is to be of that amount.
For the reason that the contribution needs to be expressed as a monetary amount, you need to commit to pay the contribution to the provider; this will then create a debt on the pension scheme. The debt must be binding so entering into an in-specie contribution arrangement should not be taken lightly and it must be clear that the contribution can be fulfilled either using an asset or if that isn’t possible by a cash contribution.
In theory it is possible to use any asset permitted by the pension provider to fulfil the debt, but those which will least fluctuate in price are usually the best. If when moved to the pension scheme the asset is more than the promised contribution, the excess will need to be returned to the client; for ease this would usually be in cash. If the asset is less than the contribution the shortfall needs to be made up with additional cash or another asset.
While commercial property does not fluctuate in value to the same degree as a share or unit trust so could be a better asset to use, but is more complex to move into the pension scheme and the process is akin to a sale by the client and a purchase by the scheme, including all associated costs.
Although many will see the movement of the asset from personal ownership to the ownership of their pension as just a simple transfer, this isn’t the case. There is clearly a complete change of ownership and any capital gains tax would need to be paid by the member on the disposal of the asset into the pension scheme. This could of course limit the benefit of the process a little or even entirely.
Amount of the in-specie contribution
The contribution, plus tax relief on personal contributions is still set against the annual allowance so this needs to be taken into account when the contribution amount is set at outset to ensure, as with any other contribution, there is enough headroom to avoid tax charges. Personal contributions will also need to have earnings in the tax year to support the tax relief claimed. It is possible to make contributions in excess of earnings but these will not receive tax relief and will still use up annual allowance. Tax relief is granted on the date the asset is received by the pension scheme, so a contribution towards the end of the tax year can be unwise because if it falls into the next tax year the client’s earnings may have changed and the tax relief from the previous year will be lost.
It is possible to make an in-specie contribution from an employer, and there is no need to have earnings to support the contribution but the client will still need to have enough annual allowance for the contribution. In some ways the employer may be better off making the contribution, because they may be able to offset the tax payable on disposal of the asset against the tax relief received on the contribution into the scheme.
In-specie contributions shouldn’t really be the first option considered when trying to contribute to a pension. Cash contributions are significantly simpler and if it is possible to get the cash into the scheme the asset itself can be purchased by the scheme at a later date, with less risk to the client should there be any issues with the purchase.
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