Back

Turn hobbies into sound investments

Published: June 2005

This article appeared in The Sunday Express

Flexible Sipp offers fun and fresh hope for retirement, reports Maisha Frost

The Problem

With a comfortable Equitable Life pension in prospect, former dentist John Harris thought his retirement was taken care of. But when the with-profits fund in which he was saving hit the buffers, his outlook became steadily bleaker.

A hobby, started when John did a mail order course in a special kind of trading in share options, suddenly assumed more importance, as he tried to make up the money lost with Equitable.

Finally John, 55, from north London, has decided to take the plunge and transfer his pension. As his options trading is going very well, he wondered: “Is there a way of combining this income with a new pension so I can still save for later life and take advantage of the tax breaks?”

The Solution

The answer is “most definitely yes”, says independent pensions specialist Benjamim Gibbs. “John had a tough break with Equitable Life but his timing could not have been better if he intends to include his hobby in his pension planning.”

Gibbs believes the answer for John is a self-invested personal pension plan (Sipp). “ This is ideally suited to someone who has a distinct target in view because with a Sipp, control lies with the saver”, he explains.

“John has an occupational pension to fall back on for his core income, so he is in the right position to explore the potential offered by a Sipp.”

“Sipps provide more freedom than standard pensions, as the saver is not restricted to the funds of one pension but a broad range of investments.”

“Instead of the 10 or so decided by someone else, John can choose among more than 10,000 funds,” adds Gibbs. One of the major attractions of a Sipp is its flexibility. “Sipps have always had this benefit but from next year this will increase”, says Gibbs.

“Anything with a value is possible as an investment, as long as the Sipp trustees are willing to take it on. Expert dabblers and smart amateurs will especially appreciate the freedom”.

Hobbyists who are investors in sectors such as good wine, art and even classic cars, will qualify in 2006.

From next April, the rules for buying property will also change to allow residential, as well as commercial, investment to be part of a Sipp, although the borrowing power will be limited to 50 per cent of a Sipp’s fund.

“At present, you need to check under Revenue rules what is permissible,” warns Gibbs. But come April, the rules become more open to interpretation and the best course will be to run individual investment choices past the Sipp provider.

John’s choice of trading involves buying shares and protecting his investment by selling options on them. This is allowed under Sipp rules, and all the gains John makes from transactions within the Sipp, come under tax-friendly pension rules.

Normal shares trading is subject to capital gains tax but John is exempt provided he trades within the Sipp.

While rental income, interest on bank accounts, bonds and guilts are also tax free, the dividend from UK shares trading is paid after a 10 per cent tax deduction. Non-taxpayers, including pension funds, cannot reclaim this.

Gibbs adds: “But as options trading produces no income, John is in the clear on income tax. And the Sipp is outside his estate for inheritance tax purposes and this applies up to his selected retirement date.”

Higher charges sometimes apply to Sipps. In John’s case, the Pointon York Sipp, recommended by Gibbs, cost £250 plus VAT, to set up, and £400 plus VAT each year to operate.

John has definitely no regrets about making his hobby and his pension perfect partners. His Equitable Life pension was losing 20 per cent a year. “Had I stayed, very little would have been left,” he says.

He has now taken out a Pointon York Sipp and on current form is looking at a 37 per cent return over three years.

“I am pretty happy that I took the radical action I did,” he adds. “My strategy is to trade up to four times a year, but most days I check to keep up to date on the price movements.”

Those with a £20,000-plus pension pot are best placed to move to a Sipp. And, a new generation of Internet-managed Sipps, with even lower charges, are now available for those with such funds.

Gibbs recommends them, adding “Sipps require a bold but sensible approach. John is now in the vanguard of this revolution of savvy Sipps savers.”

John’s Action Plan

If you have more than £20,000 to put in a pension, and other retirement plans in place, consider a self-invested personal pension (SIPP).

If you have a passion or hobby, such as share trading, check if it can make money for you within a Sipp.

Calculate income tax and capital gains tax benefits.

Use a Sipp specialist to set up a pension – and choose an Internet managed option for lowest charges.

Top