Pension simplification

The government will remove the tax advantages for self-invested personal pensions (SIPPs), small self-administered schemes (SSASs) and all other forms of self-invested pensions that invest directly in residential property and certain other ‘prohibited assets’, such as fine wine, art and antiques. Indirect investments, eg unauthorised unit trusts, that are a close proxy for direct investment in prohibited assets will be treated in the same way as direct investments.

Any attempt to invest in prohibited assets will attract tax penalties on the member (at 40%) and on the pension scheme. If the value of the prohibited asset(s) exceeds 25% of the scheme value, the scheme may be de-registered and suffer a 40% tax charge on its total value.

The government ‘is minded’ to allow investment in such assets through ‘genuine diverse commercial vehicles’, such as REITs, but will monitor their use to ensure that the funds are not used to circumvent the new rules on prohibited assets.

The rules will generally take effect from 6 December 2005, subject to transitional reliefs.

From 6 April 2006, new legislation will remove the tax advantages of recycling lump sums drawn from pension schemes to make further pension contributions. This change will not affect lump sums drawn in the normal course of taking pension benefits.

A number of other minor technical changes were also announced.