To SIPP or not to sip, that is the question
We are increasingly being asked about putting fine wine investments into a SIPP, which on the face of it seems a fairly sensible question, particularly since the pension legislation was relaxed. As far as we are concerned it’s encouraging to hear questions like this: it suggests that at least the interested parties have the right handle on the ideal term of a fine wine investment. This is not a trading market.
Can you put fine wine investments into a SIPP?
Our understanding is that although fine wine investments may not be expressly disallowed from a SIPP, most SIPP administrators are happy to lodge the question in the ‘too hard’ tray. We believe that certain types of wine fund might be ‘SIPPable’ under certain circumstances – so yes, it is a grey area.
In our view, however, this misses the point. The beauty of a pension plan is that capital gains are rolled up within the life of the plan on a tax free basis. Indeed, so were dividends until Gordon Brown’s unwelcome interference. Tax is now payable on both dividends and income when the pension is finally drawn down.
As we all know, one of the attractions of fine wine investments is that they’re exempt from Capital Gains Tax, since the Inland Revenue treats fine wine as a ‘wasting asset’. Therefore, the obvious question is: why would you want to put it into a SIPP in the first place?
One of the key objectives of any investment portfolio is tax mitigation, so why waste a valuable break in this way? Surely it is better to hold a fine wine portfolio outside your pension rather than within it, to maximise the tax break?
How you can still take advantage of your SIPP when investing in fine wine?
Since the pension regulations were relaxed, the press has been full of speculation about whether savers would immediately go out and blow the lot on Lamborghinis. Indeed, there may be some who did precisely that; far be it from us to say they are wrong. For the somewhat more conservative among you however, there is a double tax break to take advantage of here.
One of our clients, for example, told us that he was keen to increase his exposure to the fine wine market, but the only place he had loose cash was in his SIPP. Upon investigation and a consultation with his IFA, he elected to release 25% of his SIPP, which he was able to access tax free.
Here’s how it works: let’s say you have a pension fund of £500,000. At some stage, you’re entitled to take out 25% tax free – if you did that now, it would be £125,000. Let’s presume you don’t want to spend the whole lot on a cruise around the world, and instead you want to invest some of it. It makes sense to seek exposure to investments with tax breaks, so you decide that fine wine investments is the choice for you.
Remember too, that once you draw down some of your pension as PART of this tax free allowance, a ‘crystallisation’ event occurs. Let’s presume, for instance, that your SIPP is worth £500,000. You CAN withdraw £125,000 but perhaps only want to withdraw £50,000 for the moment. The revenue assumes that £50,000 is the full 25%, and your pension therefore is only £200,000. This £200,000 is ‘crystallised’, and no further part of it can be drawn down tax free.
That, of course, leaves £300,000 still in the pot. Let’s say that grows to £500,000. The next time you want to draw down a tax free amount, you are restricted to 25% of the £500,000. The £150,000 left over after the first ‘crystallisation’ event has continued to grow within the SIPP, but now lies outside of the tax free allowance.
The counterpoint to this, though, is that having only withdrawn £50,000 in the first place, a larger sum (£450,000) stays in your SIPP to merrily grow in its own tax haven space, even if you have ‘neutralised’ £150,000 of it from the tax free withdrawal perspective.
The arithmetic goes something like this:
- You start with £500,000 and withdraw £50,000 thereby ‘crystallising’ £200,000.
- £450,000 stays in the SIPP and grows by, say 50%, to £675,000. Your tax free allowance is now £112,500, or 25% of the uncrystallised part, which was £300,000 and has grown to £450,000.
- Along with the £50,000 you withdrew earlier, this makes your total tax free withdrawal £162,500.
- If you had not withdrawn £50,000, your original £500,000, having risen by the same 50%, would now be worth £750,000. The full tax free allowance would now be £187,500.
All of this means that the amount you withdrew earlier (£50,000) would have to have grown 50% over the same time frame to balance the books. We would expect an investment in fine wine to appreciate over 50% on as little as a five-year view.
London wine investments specialists can help make the most of your SIPP
At Amphora, we are not SIPP experts and it is very important that you take advice from a suitably qualified professional before considering releasing funds from your SIPP.
We are however, London wine investment specialists and pretty good at fine wine as it goes. So if you need advice on how to spend your investment, and what the best fine wine investments are for your particular circumstances, then contact us and see how we can help.
Alternatively, have a look through our fine wine stock list to find out more about the wine investments we offer.