Barristers can now contribute up to 100% of earnings—up to a generous cap of £235,000 for the 2008/09 tax year—securing income tax relief at up to 40% on that contribution. They can continue to fund as aggressively as they wish within their annual allowances, providing their total retirement fund does not exceed the annual lifetime allowance (£1.65m for 2008/09).
Progressive pension planning
Self-invested pension plans (SIPPs) offer flexibility, control over investments, and the ability to hire and fire advisers without penalty. But unlike private company directors, the self-employed have been denied the ability to use pension savings to assist in their business—until now.
The sweeping reforms to pension regulation enable a barrister to use pension funds to purchase commercial property. Three important advantages flow from this route: tax relief on contributions going in; arms’ length rent payable to the pension fund (deductible as an expense to the business); and tax free capital growth on the building and its income. An individual SIPP may offer this facility, but the capacity to purchase commercial property will be restricted by the size of the fund and the annual lifetime allowance of the individual concerned. However, a recent development from the new legislation, the Professional Practices SIPP (PP SIPP), will overcome this obstacle.
Professional Practices SIPP
Barristers, and groups of like-minded individuals generally, can make their pension contributions into a pooled fund and combine their annual allowances to create far greater buying power than an individual SIPP investor. If, say, 10 barristers in chambers joined together in a PP SIPP, they have the collective potential to buy and retain a building in the PP SIPP worth up to £16.5m. Existing pension arrangements can be transferred into the pooled scheme if required, and the fund can gear up by borrowing up to 50% of the net asset value of the pooled fund. Thus, if the 10 barristers transfer existing pension funds of £2m into their PP SIPP when they set it up, they can, with gearing, potentially buy commercial property of up to £3m straight away.
Barristers joining chambers can be eligible to be part of the PP SIPP, and those who move away can leave the plan. However, all decisions need to be unanimous. With careful management, including policies about joining and leaving, the PP SIPP can be tailored to suit each chambers.
David Quinton is a senior consultant at Smith & Williamson. Email: David.email@example.com