You may have seen headlines such as ‘The Classic Car market is in the fast lane again and beating returns on equities and other more traditional assets’ (Investors Chronicle.co.uk 04/01/2013) and ‘Classic Cars are proving to be one of the most lucrative and robust investments around, providing the right marque and model is chosen’ (FT.com 24/05/2013).
The purpose of this article is to look at the changes to pensions legislation that will come into force from next year as a result of the recent Budget which will enable people to ‘unlock’ the capital within their private pensions without any limits being imposed. It will also examine whether it would be a wise decision to take a pension as a lump sum and invest the proceeds into an alternative asset such as a classic car.
I have personally had several conversations with clients regarding the ability to take pension benefits as a lump sum and none of them had fully understood the tax implications of doing so. In the vast majority of cases the tax free cash lump sum that is available will be 25 per cent of the fund. The remaining 75 per cent of the fund is added to your taxable income for the year and is taxed as if it were earned income.
All of a sudden you can see that taking your pension benefits in one lump sum could be a bad move from a tax point of view.
Now whilst we often read about certain classic cars fetching millions of pounds at auction, the vast majority don’t appreciate by much, if at all and the quote earlier on hits the nail on the head ‘Providing the right marque and model is chosen’. Who knows what will be the ‘in demand car’ in years to come?
Putting that aside, a classic car is an illiquid asset that you cannot draw an income from, and unless there is demand for it you cannot sell it either.
If you retain the car until death, it will form part of your taxable estate and if you exceed the Inheritance Tax Threshold your beneficiaries will pay 40 per cent tax on it (unless it passes to your spouse).
So whilst classic cars can be excellent investments that sometimes can produce decent returns, the answer is no, you shouldn’t cash in your pension and run out and buy one.
We see the changes to pension legislation as highly positive and pensions have now become more flexible than ever before. Assets held within your pension are not liable to Capital Gains Tax when they appreciate in value, on death uncrystallised benefits do not form part of your estate for inheritance tax purposes and now you have complete flexibility when drawing an income from next year as the income limits are being removed.
Our ‘Goals Based Investing’ approach ensures that the assets/investments that are held within your pension will remain liquid so that should you wish to take benefits or change the investments that you hold, you will be able to do so.
Retirement planning is now more important than ever and making the correct decisions is essential.
Speak to your Ludlow adviser for further information on the impact that the changes to pension legislation may have on you.