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A-Day investment spree in the UK
From fine wine to works of art, Derby winners to Dinky toys, the new pension rules in the UK will permit a wide range of exciting investments. From next April, higher rate taxpayers will be able to enjoy a discount of up to 40 per cent on the purchase price of such assets for their pension pot.

A great deal of excitement has been whipped up about the opportunity to invest in residential property, particularly buy-to-let. But the Revenue is not known for giveaways and the snag is that either the going market rent must be paid, or the Revenue will impose a 5 per cent benefit-in-kind tax charge, based on the market rent, plus the propertyís value over £75,000.
Letís assume that Tony, a higher rate taxpayer, buys a £200,000 flat for son Euan at Bristol University, for which the going rent is £6,000. However, Euan is fortunate to be let off the rent and so his father will face a benefit-in-kind charge of £4,900, or 40 per cent X £12,250, which is the sum of the £6,000 rental, plus £6250 relating to its value (5 per cent X £125,000(£200,000 - £75,000)).

Holiday homes

Holiday homes abroad will be popular, but many countries do not recognise the exemption status of trusts. Specific laws apply in different jurisdictions, such as death duties in France, or having to purchase property within a local company in Bulgaria.

Off-plan property

One way to beat next Aprilís property queues and hyped up prices is to buy off-plan. Provided the property is not finished before A-Day you may spread the purchase cost over two years, usually with an attractive discount from the developer. This is possible because the Inland Revenue recently clarified that residential property is not classed as such until a habitation certificate has been issued, to show you can move into it. Until then, its non-residential status means it qualifies straight away.

Luxury and recreational assets

Next year you will also be able to use your pensionís attractive tax break to slash the cost of acquiring art, wine and classic cars. However, the subsequent advantages of sheltering assets in a pension that will not count towards your Capital Gains Tax liability are modest. For instance, all wine and vintage cars, and any jewellery, pictures, and antiques sold for £6,000 or less are exempt from CGT anyway.

Any recreational assets put in your pension to ease the cost of an expensive hobby, such as flying or sailing, will also suffer a benefit-in-kind tax charge.

Liquid assets

If you expect you will ultimately need to live off your pension, assets which are illiquid and non-income generating should probably be relegated to the bottom of your wish list. Property cannot be sold piecemeal, so on retirement you must either buy it from your pension, perhaps using the tax-free cash released at the time, or ensure that there are plenty of other liquid assets in your fund that can be sold to provide an income.

More choice

Whilst a 40 per cent discount on a gleaming yacht has huge appeal, for most people the real benefit of the new rules will be the freedom to choose across the universe of unit trusts. Many people contribute to pension arrangements that are shackled to mediocre pension funds that lag behind the average unit trust in the same sector.

Some investors will fall out of the frying pan and into the fire of cheap pension plans that insist on substantial investments in their own funds. Wherever strong arm tactics are deployed to attract new money, a provider usually lacks the performance record to win business on its own merits.

Diversify your portfolio

Investors will also be able to choose from the range of quoted shares, gilts and bonds. Many private stock pickers make the mistake of investing too much in certain sectors, such as retail stocks, or in the shares of their employer or rival companies operating in the same sector, whose product range they understand. The danger is that if that sector then struggles, the investorís entire portfolio plunges at once. A wide spread of assets is required to reduce the impact of one sector underperforming.

Equity funds
However, equities have outperformed government bonds by an average of around 4 per cent a year since 1900, and over nearly every discrete ten-year period. This yearís influential Barclays Capital Equity Gilt Study predicts that this trend will strengthen.
Equity funds are therefore the preferred choice for anyone who wants to have a good stab at growing their pension as much as possible. A very young person could sensibly invest up to 70 per cent in equity funds, but anyone approaching retirement should switch into less volatile assets.
Contracts for Differences
Derivative-style contracts such as Contracts for Difference are another new option, and are a great way for the expert investor to take a leveraged bet on movements in share prices and indices, because only a small deposit of perhaps ten per cent of the value of the trade needs be put down, enabling you to take a much larger position than if you had to buy the physical shares.

Despite the hype, not every pension provider is likely to allow investment in esoteric assets, through fear of another mis-selling scandal. A straw poll of five top-notch advisers revealed that they would disengage a client who insisted on investing in an esoteric asset against their better judgement.

Whatever the outcome of the above in the UK, it would be nice to see the powers that be in Ireland coming up with similar ideas to make it more attractive for people to invest in pensions in any manner.