General questions
- What exactly is a SIPP?
- What is A-Day?
- What is pensions simplification?
- What will simplification mean for me as an ordinary person?
- What are some of the main changes?
- How does it compare to my company pension?
- I have heard that I can put all sorts of assets, including wine, into a pension in future. Is this true?
- Do I need to use a financial adviser?
- How can I find a good adviser?
- Who sells SIPPs and how much do they cost?
- Is there a list of SIPP providers?
- Can I get tax relief on my pension investments?
Wine-related questions
- Is wine free of Capital Gains Tax?
- What is the benefit of putting wine into a pension fund?
- What are the drawbacks of putting wine into a pension fund?
- Can I put wine I already own into a pension?
- Can I use wine from my pension when it’s ready for drinking?
- Is wine a good investment for a pension fund?
- Will all SIPPs providers accept wine from A-day?
- How can I buy wine for a SIPP?
- Where can I buy wine for a SIPP?
- If I buy from a merchant not linked to my SIPP provider will there be a charge?
- How will the wine in my SIPP be valued?
- I hear that the price of fine wine is currently going through the roof. Is this correct?
- Which wines should I put into my SIPP?
- What about en primeur?
- How will the Inland Revenue define ‘fine wine’?
- What about investing in a wine fund?
- So what are the dangers?
- What should I do before A-Day?
- Useful websites
SIPP is short for Self Invested Personal Pension. SIPPs were first introduced in 1991. They were designed to give people more flexibility and control over their pensions. They are often described as a ‘pension wrapper’ into which you can put various investments. However until now what you have been able to invest has been limited to things like to stocks, futures and options, unit trusts, commercial property both freehold and leasehold. There are thought to be about 100,000 Sipps holders at present out of 6.5m people with personal or stakeholder pensions. The number of SIPP holders is expected to rise considerably following A-Day.
A-Day on 6th April 2006 will see the reforms passed in the 2004 Pensions Act introduced to a wide range of pensions including SIPPs. The promised flexibility of these reforms has made SIPPs one of the most talked-about items of the pension reforms.
The take up of SIPPs is likely to be much less following the Chancellor’s pre-Budget statement on 5 December
What is pensions simplification?
The new regime that starts on A-Day is intended to simplify pensions. One universal regime will replace the eight existing tax regimes. This will affect both occupational pension schemes and personal ones. Instead there will be two controls: the pension lifetime allowance and pension annual allowance. At present the limits on annual contributions vary considerably from one pension type to another. Also the amount you can pay in has been limited both by your income and age. There will also be greater flexibility over when you can start taking benefits.
What will simplification mean for me as an ordinary person?
Because of the lifting of the income restrictions most holders of personal pensions will be allowed to put more into their portfolio. It should also mean that pensions are less complicated.
What are some of the main changes?
You will be able to invest up to £215,000 in a pension during the 2006-7 financial year. The Pension Annual Allowance will rise annually to £255,000 in 2010, This will then be reviewed every five years. The maximum tax relief will be 100% of your earnings.
The Lifetime Allowance (ie the maximum amount that you can have in your pension tax-free) will be £1.5 million. This will rise each year until, by 2010, it will be £1.8m. This will then be reviewed every five years. Savings above the lifetime allowance will be taxed at 25% when you take your benefits unless you take it as a lump sum when you will taxed at 55%.
You will also be able to take pension benefits while continuing to work and adding to your pension fund. If you’re a member of a company pension scheme, you’ll no longer have to leave your job to draw a pension. From 2006, you can choose to draw all, or some, of your pension while still working full- or part-time for the same employer depending on your individual scheme rules.
You will also be able to take a tax-free lump sum of up to a quarter of the value of your benefits to a maximum of 25 per cent of your Lifetime Allowance. For 2006/7 this will be £375,000.
You will be able take benefits from the age of 50 but this will rise in 2010 to 55. However after 2010, there will be some circumstances, such as ill-health, where you will be able to take benefits before reaching 55.
How does it compare to my company pension?
You will be able to have both a company pension and a SIPP. There is no need to choose one or the other. With a SIPP you will have a greater say over what you put into it.
I have heard that I can put all sorts of assets, including wine, into a pension in future. Is this true?
The 2004 Pensions Act widens considerably enlarges the range of things that you can invest in. Wine is one of the new things you can include in your SIPP. Other assets include residential property including overseas property, pictures, racehorses and yachts. The Inland Revenue has not yet published the rules covering many of these newly permitted assets. Many of these may well be taxed as a benefit in kind, a yacht for example, and you may have to pay rent to your pension fund on your home if you put it into a SIPP. Furthermore some SIPP providers may be reluctant to allow investments in wasting assets.
Brown’s announcement has made what it is permitted as well as what is worth putting into a SIPP highly uncertain. It may well still be possible to get tax relief on managed wine funds.
Do I need to use a financial adviser?
Definitely. You need sound financial advice when considering and setting up a SIPP. You should contact an IFA (Independent Financial Adviser). Preferably one who is truly independent and charges an upfront fee for their advice and does not push particular financial products. Your IFA will recommend SIPP providers who are best suited to your circumstances. The SIPP provider will then set up the SIPP for you.
How can I find a good adviser?
In the pensions and retirement section of the direct.gov.uk there is advice on IFAs, what they do and their fees. You can search using your post code to find your nearest IFA and whether they charge fees or earn commission on the products that they sell.
Who sells SIPPs and how much do they cost?
SIPPs are sold by SIPP providers. These are either specialist firms, like the AJ Bell Group with their SIPP Centre or Suffolk Life, or the large pension companies such as Scottish Equitable. You will generally be charged a fee for setting up a SIPP plus an annual fee. The more complicated your SIPP the higher the fees are likely to be. A survey of the leading 19 SIPP providers in The Guardian (8 October 2005) shows set up fees ranging from no charge but permitted to invest in only a restricted range of funds to £705 by Greyfriars Asset Management. Most set up fees were between £300 to £400. Most annual fees were around £500. Given the charges SIPPs are likely to appeal only to high-worth individuals.
Is there a list of SIPP providers?
We haven’t been able to find an up to date list. However, www.find.co.uk has a list of personal pension providers – some of whom offer Sipps. In any case it should be your IFA who suggests the right Sipp provider for your individual requirements.
Can I get tax relief on my pension investments?
Normal taxpayers get 22% tax relief, while those on a higher rate will get 40% relief. If as a basic rate taxpayer, you buy £10,000 worth of wine you will actually pay out £7800. Your SIPP trustee will reclaim the additional £2200 from the Inland Revenue and this will be added to your fund. If you pay tax at 40% you can reclaim the additional 18% from the Inland Revenue either through your annual self-assessment return or by applying directly to your tax office. This will be done by you as taxpayer rather than by your provider. At present there appears to be no requirement on you to add this relief to your pension fund.
After 5 December you will not get tax relief on wine and some other alternative investments, although contributions to managed wine funds may well qualify for relief as this is similar to investing in a unit trust. We are still awaiting clarification on the exact position.
Is wine free of Capital Gains Tax?
Although there is a widespread belief that wine is exempt from Capital Gains Tax (CGT) because it is a wasting asset, this is not entirely the case. A wasting asset is defined as something with an expected useful life of less than 50 years. Thus clearly most wines are wasting assets but not some of those most likely to accrue in value over time. If you buy Château Margaux 2000 in 2006 it is likely to be still drinkable in 2056, so may well be subject to CGT. However, if you buy a case of Mouton-Rothschild 1945 now it is likely to be considered a wasting asset as there is a good chance that it will be undrinkable in 50 years time. It would not, however, have been considered a wasting asset if you had bought it in 1947.
The normal Inland Revenue rule on this is that a gain ‘arising from the disposal of investments held for the purposes of a registered pension scheme is exempt from Capital Gains Tax’. Only certain property schemes will attract CGT.
What is the benefit of putting wine into a pension fund?
The main benefit of putting wine into a pension fund is that you hope that it will gain in value and that you will be able to claim tax relief on it. Putting wine into a SIPP should ensure that it is free of capital gains tax, whereas wine invested outside a pension may be subject capital gains. Although the rules have yet to be published it is widely expected that wine in a pension scheme will have to be stored in bond.
Following 5 December any wine in a pension fund will not be eligible for tax relief, although contributions to managed wine funds may still be eligible.
What are the drawbacks of putting wine into a pension fund?
The wine will no longer be under your direct control. As it is part of your pension fund you may well not be able to remove it as and when you wish. You will have to convince your trustee that the wine should be removed from your pension portfolio. You will also have to pay the current value of the wine that you wish to remove into your pension fund.
There now appear to be few advantages, though there may be some tax advantages when drawing benefits. This awaits clarification. Without the advantage of tax relief it is now highly likely that SIPPs trustees will not accept wine as a suitable asset to put into a pension portfolio.
Can I put wine I already own into a pension?
In theory yes but there are complications. Again the rules on exactly how this will be done have not yet been published. The wine will need to be valued and then transferred by your provider into your SIPP. This process is likely to be easier if the wine is already in bond. If it is stored elsewhere – your own cellar for instance – there may well be questions of provenance. Trustees may well be reluctant to take the risk of accepting wine that might turn out to be badly stored or, at worst, fake.
It is now highly unlikely that you will be able to put wine you already own into a pension.
Can I use wine from my pension when it’s ready for drinking?
You certainly will not be able to draw your pension in liquid form. Putting wine into a SIPP means that it is no longer under your control. Instead it will be administered by your SIPP provider and decisions will have to be approved by your trustee. Also if you have ready access to your wine the Inland Revenue are likely to treat this a benefit in kind and tax you accordingly.
The Chancellor appears to object to alternative investments in pension funds if they are designed as personal benefits rather than investments. Therefore it is most unlikely – whatever the final arrangements – that this will be permitted.
Is wine a good investment for a pension fund?
Certainly the advice is that alternative investments should not make up more than 5% of your pension portfolio and that wine should only account for part of this. The three rules of wine investment are simple: it has to be the right wine, from the right vintage and bought at the right price.
Very few wines are suitable vehicles for investment – see Which wines should I put into my SIPP? Fine wine is generally a long-term investment and so ought to be suitable for a pension fund. However fine wine tends to go through a series of short growth spurts and then plateau out for a long period. Apart from a possible sharp rise for a highly fancied vintage, such as 2000, when first available en primeur, the most significant increase in price tends to happen when the wine starts to be ready for drinking and so supplies start to reduce.
When comparing the performance of wine against the stock market the annual costs of storing wine is often forgotten. The normal annual storage charge per case is between £12 and £15 inc insurance and vat. There will also a commission charge of around 10% when you come to sell. You’ll have the SIPP provider’s annual charge on top.
The price of wine can also go down. Although generally less volatile than stocks and shares, wine is obviously affected by economic conditions.
When deciding whether to invest in wine it is essential to be dispassionate, set aside the romance and consider only their investment potential. Remember that Decanter’s Bordeaux Index was reset at 100 in December 1996. By December 2005 the index has climbed to 117.6 – a rise of 17.6% in ten years. That rate of growth makes a humble building society’s rates look stratospheric.
Following 5 December this may well be an academic question: the caveats now outweigh any remaining advantages.
Will all SIPPs providers accept wine from A-day?
No. Some providers will not be offering the option to put in wine or other alternative investments. Suffolk Life, a leading SIPP provider, has recently announced that they will not be including wine and other ‘exotica’ in their SIPPs at least until the FSA regulatory regime is in place. This is not expected before April 2007.
Similarly the AJ Bell group, the third largest provider of SIPPs, will not be including wine. ‘We will not be supporting wasting assets – something with less than 50 years useful life,’ said Fergus Lyons, their commercial director. ‘They attract both a disproportionate amount of tax and responsibilities.’
Without the benefit of tax relief, SIPP providers – already doubtful – will surely be even more reluctant to include wine in a SIPP.
How can I buy wine for a SIPP?
Your SIPP provider will buy the wine. They are likely to have links with particular merchants or fine wine brokers. For instance Simon Staples of Berry Bros & Rudd told Decanter that they will be the recommended supplier to three of the biggest SIPP providers.
Now probably an academic question.
Where can I buy wine for a SIPP?
Unless you are happy to leave it to the SIPP provider to use a particular merchant, you may well want to recommend merchants that you already deal with or check on wine-searcher.com for the best deals. Unlike stocks and shares, there is no fixed price for fine wine. On 29th November wine-searcher showed that the price charged for a case of Cheval Blanc 2000 by UK wine brokers varied from £3795 to £4356 – a difference of £561 or 15%.
Now probably an academic question.
If I buy from a merchant not linked to my SIPP provider will there be a charge?
There may well be. Berry Bros & Rudd, for instance, will charge for £20 each product that has been sourced elsewhere to be booked into a SIPP. The £20 charge will apply whether it is one case of Latour or 100 cases.
Now probably an academic question.
How will the wine in my SIPP be valued?
This is a crucial question and there is no consensus amongst the fine wine trade as to how this will be done. Alan Rayne of Magnum Fine Wines plc believes that this will have to be based on auction prices. Others, like Ian Ronald of Armit, point out that auction prices can vary considerably depending on provenance. Armit will be using the web-based fine wine exchange Liv-ex, as will Brooks Macdonald Group plc. Berry Bros & Rudd will base valuations on prices from leading brokers, such as Farr Vintners. Berry’s undertakes that its valuation will never be lower than 80% of the in-bond case price on bbr.com.
Valuation will remain a problem but is probably not longer relevant as wine is unlikely to be included in SIPPs.
I hear that the price of fine wine is currently going through the roof. Is this correct?
Prices of certain fine wines have certainly risen over the past year to 18 months. This has been put down to a combination of anticipated demand for SIPPs as well as demand from emerging markets including China and Russia. However, this has to be set into a longer-term context. Prices for top Bordeaux fell back between 2002 and 2004 and some are only now returning to the 2001 price level. However if there is a big take-up for wine as part of a SIPPs portfolio then prices may well rise dramatically as the pensions’ industry runs to billons while the total fine wine market probably has a turnover of around £500 million. Equally should the Inland Revenue’s fine print contain some nasty surprises or if many SIPP providers and the pensions industry on the whole decide that wine is too risky, complicated to administer, does not offer sufficient liquidity or is just not worth the trouble then prices are likely to fall back.
It is not clear how far the rise in prices is due to pre-SIPP speculation or to increased interest in fine wine from America (as the dollar starts to strengthen), and Asia-Pacific, especially China.
Now that Gordon Brown has blown away the froth around SIPPs, prices are likely to fall. All depends on how much the rise was due to speculation around SIPPs and how much due to increased global interest in fine wine.
Which wines should I put into my SIPP?
Your trustee probably will not accept any wines that are unlikely to accrue in value or that are risky. Your best bets will be First Growth Bordeaux from good vintages, a few top Burgundy producers such as DRC, top Rhône and some high flying Italians. Over-hyped cult wines from Australia should be avoided. Naturally First Growth Bordeaux is likely to be most people’s choice and, if there is a big demand, then prices will continue to rise and it will be difficult to acquire the wines you want.
The choice remains the same even though few will now be putting wine into SIPPs.
Because there is no actual stock some SIPP providers are likely to decide that en primeur is too risky. ‘We won’t be buying en primeur because there is no stock and the danger that the quality of the vintage has been over-hyped,’ said Alastair Butt of Brooks Macdonald Group PLC. ‘It’s too much of a risk.’ Furthermore, canny pension managers are likely to be decidedly wary about basing long-term buying decisions on fragile barrel samples of young wine tasted in Bordeaux in late March or early April following the vintage, especially as there is no form of control over whether the samples are representative or not and the wine will spend at least another 12 months in barrel.
Almost certainly now a non-starter. The 5 December decision may persuade Bordeaux producers to moderate the price they set for 2005 en primeur.
How will the Inland Revenue define ‘fine wine’?
Some in the wine trade – for example Alan Rayne of Magnum Fine Wines – think that the Inland Revenue will try to pin down a definition of fine wine to prevent unsuitable wines being put into SIPPs. Others believe that the Revenue will be content to leave it to pension fund trustees to fulfil their responsibilities. The Revenue has the power to declare unsuitable investments ineligible, after the SIPP has been set up.
Now highly unlikely as wine will not be eligible for tax relief.
What about investing in a wine fund?
These are certainly worth considering. After A-Day these unquoted investments such as the Vintage Wine Fund run by OWC Asset Management Limited and the fund being set up by Brooks Macdonald will be allowed to be included as part of a SIPP. Both of these companies are approved and regulated by the Financial Services Authority. OWC require a minimum subscription of €100,000. The Brooks Macdonald fund will require at least £5000; the actual sum has not been finalised.
Investing in a fund should give the investor a larger spread of wines than they could afford as an individual. A fund can benefit from price changes that would be difficult and time-consuming for an individual to monitor. As with any fund, their performance will be significantly dependent on the competence of the people managing them.
Managed wine funds now look to be the only way you are going to be able to invest in wine as part of a SIPP. It is likely that any contributions to a fund will attract tax relief, but this has to be confirmed. Brooks Macdonald may now not launch their fund as they fear that Brown’s U Turn will have put people off the idea of wine investment in a pension. They will decide once the position is clearer.
SIPP providers are unlikely to be regulated by the FSA before April 2007 at the earliest, so this may give a 12-month window of opportunity for mis-selling. However as there are only 35-40 trustees in the country and they will have to approve wine purchases this may make it difficult for the unscrupulous to offer over-priced or non-existent wine. John Moret, Suffolk Life’s director of sales and marketing director recently warned. ‘This one year window of unregulated activity is a disaster waiting to happen. Contrary to the FSA’s belief the majority of SIPP providers are not currently regulated. As a result there is a high risk of poor advice and misleading advertising during this 12-month period with little or no protection for investors.’
The Financial Services Authority warns on its website:
‘Are SIPPs regulated?
Mostly not. You will be able to choose from a wider range of investments and buy from firms that cannot offer you regulated investments. But you should bear in mind that you will not have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme if you try to make a complaint or to try to get compensation. The government is proposing that the FSA regulate SIPPs from April 2007, but meantime advice on joining a SIPP or choosing unregulated investments to hold within a SIPP is not regulated.’
What should I do before A-Day?
It would be sensible to find an IFA if you do not already have one. As far as wine is concerned it would be prudent to wait for the Inland Revenue to publish the fine detail before deciding whether to put wine into your SIPP.
Apart from finding an IFA, it would now be foolish to do anything until the legislation is in place and the Inland Revenue has published the fine print.
Useful websites:
www.direct.gov.uk/MoneyTaxAndBenefits/PensionsAndRetirement
Gives clear and simple advice about the pension changes.
www.hmrc.gov.uk/manuals/rpsmmanual
This is a Government site that carries the pensions regulations – some of them are yet to be listed. Highly complex and not for the faint-hearted.
www.hmrc.gov.uk/pensionschemes/pts.htm
Inland Revenue advice on pension changes.
www.winesearcher.com
This very useful searcher engine lets you search for wine prices and availability from around the world. If you are serious about wine investment you should pay for the professional version. At a modest $29.95 a year this is a very sound investment.
www.liv-ex.com
Another very useful site, which would have been used by a number of companies to provide independent valuations for wine in SIPPs.
www.fsa.gov.uk
FSA Financial Services Authority
Worth checking the FSA register to see if your SIPP provider is FSA approved.
NB While decanter.com has taken every reasonable precaution to ensure that this information is accurate, readers should not make any investment decisions without seeking advice from an Independent Financial Adviser.
