IN the articles I have written to date
for Veterinary Practice, I have largely
focused on what might be termed
“mainstream” areas of financial
planning such as pensions, ISAs,
income investing, etc.
I am all too well aware from my
many meetings with new and existing
clients that, in the light of various mis-
selling issues, the demise of Equitable
Life, the two pronounced
bear-markets during
this past decade and
sundry other matters,
many people have lost
faith both in my
industry and those who
offer advice within it.
As a consequence,
there are those who
have (wrongly) simply
decided not to bother
making any provision
towards their own long-
term financial security,
and there are others
who have decided to
do their own thing,
perhaps by building
their own share or property portfolios
or by dabbling in whatever else happens
to “float their boat”.
But the reality remains for most
people that they do not have enough
time, interest, knowledge, confidence or
whatever else to construct their long-
term escape from work strategy.
Nor should anyone forget the
fundamental point that, for a 40%
taxpayer, a pension contribution (subject
to the restrictions introduced in 2009
for “high-earners”) is the only way in
which we can obtain 40% tax relief
(20% immediately with the additional
20% being reclaimed via the individual’s
tax return). A net cost of £60 gives a
£100 gross contribution – a 66.6% uplift.
Equally, ISAs, with the increased
annual contribution limit of £10,200 a
year (this applies immediately if 50 or
over this tax year or for every investor
to an equities ISA from 6th April 2010)
should not be casually ignored.
A strategy of pursuing capital
growth during our working lives can
easily be converted at retirement to a
regular tax-free income stream whilst
retaining full access to the invested
capital. Of course, the favourable tax
treatment given to ISAs is subject to
changes in legislation.
It may be that you, as an individual,
accept these points but find the
conventional investment choices a little
limited or lacking in the risk
department, and I will be looking in
more detail in future articles at how you
might add that extra element of
excitement to your strategy.
Amongst the investment areas which I will be covering over the
coming months are: investing in
emerging markets, and alternative assets.
I am also keen to try and focus my topic
material on areas which are of specific
interest or concern to readers of this
magazine so, if any of you have issues
that you would like me to address,
please let me know.
For the remainder of this piece,
however, I am going to return to the crusty
old subject of
pensions in the
context of buying
your practice premises.
Ever increasing
numbers of vets,
whether in small or
large practices, are
looking to buy their
business premises
through their pension
funds. The attractions
of doing so are fairly
obvious when you
consider that
commercial property owned through a Self
Invested Personal Pension (SIPP) becomes entirely free of UK taxation,
prior to taking benefits.
There are no Capital Gains Tax
implications upon subsequent sale of
the property, and the rental income,
which is normally a fully deductible
business expense, is not subject to tax
either, making this a very attractive and
efficient way to own your premises.
Where there is more than one
individual in a practice, a syndicated
SIPP arrangement can be employed and
the partners can hold different shares in
the property. The only small downside is
that the rules for borrowing money to
help finance the acquisition are less
generous than they used to be.
An individual can borrow the
equivalent of 50% of his, or her,
pension fund value – in simple terms,
that means that if you have a pension
fund of £100,000, you can borrow a
maximum of £50,000 to acquire
property valued at £150,000.
Start early
It, therefore, follows that it is probably
fairly sensible to start making reasonable
pension provision at an early age if you
envisage acquiring your own premises,
tax efficiently, at some point in the
future.
Having been young myself once
upon a time, it is all too easy to dismiss
any consideration of retirement when
there appear to be far more pressing
financial issues such as student debt,
mortgaging yourself to the hilt, holidays
and so on. But there is an inevitable
cost involved in delaying making proper retirement provision which, in broad
terms, can be quantified as an additional
50% for every five years that the
planning is put off.
And to heap some further misery
upon you, with the anticipation of
further increases in life expectancy, the
actual cost of making adequate
retirement provision is likely to rise in
the future if we wish to retain the same
retirement age expectations. The
alternative is to simply accept a longer
working life – not so easy if you work
with large animals, as several of my
clients have testified over the years.
Work out the need
Sad person that I am, though, I actually
enjoy sitting down with clients and
working out what they need to do to
help them actually achieve their targets
and it is hugely rewarding to be able to
tell a client who has been planning to
retire, for example at age 60, that he can
actually afford to give up earlier than
that.
It is interesting how, for many
people, work becomes less of a burden
when they know they are in a position
to continue out of choice, not of
necessity.
I should also point out that a pension comprising only of business
premises, or share thereof, is never a
good idea – all of your eggs in one
basket, etc! Problems could arise at
retirement if you cannot sell the
property or share in a property.
How would you extract your tax-
free cash entitlement and what if the
rental income was less than an annuity
could provide? Worse still, what if the
rental income ceased when you finished
because no one wanted the property?
This is where the role of your
financial adviser in building a trusted
relationship over time can be so
important. In my experience, even those
individuals who consider themselves
capable of managing their own financial
affairs, can make some fundamental
mistakes, often through a lack of
objectivity.
I would argue that virtually all of us
can benefit from having an external
viewpoint put to us.
- For further information or to discuss
any aspect of financial planning, contact
the author, a founder member of The
Ellis McComb Partnership, 3 Mortimer
Street, Birkenhead, Wirral CH41 5EU;
telephone 0151 650 6520, e-mail
ellis.mccomb@sjpp.co.uk, website
www.sjpp.co.uk/ellismccomb.
