Many company owners and directors may have been wrongfooted by chancellor Gordon Brown’s U-turn on pensions late last year. From April 6th just gone – the so-called A-Day – we were all supposed to be able to put anything from fine wine, works of art, racehorses and holiday homes into our pensions.

Worried that everyone was going to go out and buy a second home in the south of France at his largesse – and there would have been major tax breaks for doing so – the chancellor panicked and in his December pre-Budget report closed down this loophole of his own making.

Not surprisingly, much of the media’s focus has been on this volte-face. The financial services industry has been in uproar since it has spent a fortune on gearing up to launch new products based on putting exotic investments into pensions. Many individuals had also exchanged contracts on properties they were going to put into their pensions.

Lost in all of this is that the holiday homes, the wine and the whisky were always just a detail of what was going to happen on A-Day and not the main show. Last month did still see one of the biggest shake-ups in pension rules since personal pensions were introduced in the late 1980s and, arguably, long before that. The landscape has completely changed.

Pensions have become a whole lot simpler and there are many aspects of the new regime that company directors and small businesses need to be aware of: A–Day has still taken place despite Mr Brown’s sudden change of mind on just one aspect of it.

So it is important to remind ourselves what the key changes are. Previous to April 6th, anyone investing in a pension was caught up in a myriad of rules. There was a cap on how much you could contribute to your pension in any one year based on how old you were. This was usually a relatively small percentage of your salary and was quite limiting. There was, however, a mechanism for making up contributions if you hadn’t made your full contribution in recent previous years.

In the post-A-Day world, this has all been dispensed with. Now people are allowed to invest a sum up to the value of their entire salary, so long as that doesn’t exceed £215,000 in any one year. They can also invest up to £3,600 a year even if they don’t earn anything at all. You are also allowed to have a pension pot as large as £1.5m tax free in this financial year, rising to £1.8m in 2010-11.

These changes have been designed so that people can put more money into their pensions, if they so wish, without being overly restricted. Overnight, eight different sets of pension rules applying to different types of pensions have been replaced by one simple regime.

Mike Warburton, senior tax partner at accountancy firm Grant Thornton, says the new rules should be more beneficial to most company owners and directors. “They are a lot more generous than they have been up until now. I think it is a step forward in terms of encouraging people to save,” he says. “The lifetime allowance of £1.5m is more than the vast majority of people would be saving anyway, although I do have clients with £5m or £6m in their pension pots.”

Property boom

One of the main focuses before the chancellor’s U-turn was putting residential property into pensions but of more interest to business owners and directors was the rules regarding commercial property. There have always been advantages for business owners in putting their own business premises into a company pension fund. It has been common practice among partnerships such as, for example, doctors and dentists, to buy the building in which they work and then derive an income from it when they retire.

As a result of A-Day, commercial, unlike residential property, remains a legitimate pension investment. However, the rules for investing in commercial property have been tightened up.

Prior to A-Day, a company could borrow up to 75% of the value of a commercial property to put in its pension so someone with a fund of £100,000 would be able to borrow £300,000 and buy a property worth £400,000. Now you will be allowed to borrow just 50% of the value of your actual fund so a fund of £100,000 would only be able to purchase property worth £150,000.

However, while this might be regarded as bad news, there is other good news on commercial property investments for some company owners. Before the change of rules, many company owners and directors who owned their commercial property personally could not put it into their company pension fund because it was regarded as a connected party transaction. But this is no longer a barrier and they will be able to make such transfers in future.

“The connected party transaction rules often stopped people putting commercial property into their company pension,” says Peter O’Sullivan, director of Tenon Financial Services. “A lot of our clients, particularly in partnerships, have not taken the tax advantages of having commercial property in their pension but now they can make contributions into their pensions in terms of their commercial property and not cash.”

Direct access It may also be easier for directors to organise their pension arrangements. Prior to A-Day, most small company pension schemes were SSAS (small self-administered schemes) which was usually a pooled investment for all the directors. Because the rules for all pensions are now the same, company directors may now prefer to have their own individual pension through a SIPP (self-invested personal pension).

So in the case of a commercial property, a director could own a distinctly allocated share of the property through his or her SIPP. “If you have a SIPP, the investment is actually in your name rather than a pooled investment. Going forward, if I was buying a property with other directors I would arrange it through a SIPP because it is more straightforward,” adds O’Sullivan.

Warburton at Grant Thornton believes the changes may make many company owners and directors reassess whether to have company pension schemes separate to their personal ones. “Now it makes no difference whether a pension is a company scheme or a personal one,” he says. “It is all under the same rules and many people may find the new environment more flexible.”

Another key rule change as a result of A-Day is that people are no longer forced to buy an annuity at the age of 75. This was an anomaly of the old system and a deterrent to pension investment because if you took out an annuity at 75 and died shortly afterwards, you would not be able to leave the money you had built up to your dependents. But now they will able to hang on to the capital sum and make draw-downs from it within certain rules. The money can then become part of their estate.

“What this means is that you don’t have to buy an annuity even if you are 97,” says Tom McPhail, head of pensions research at independent financial adviser Hargreaves Lansdown. “If you then die the fund can be used to provide your surviving spouse with a pension.”

Paying dividends

But Mark Bridge, a partner specialising in owner managed businesses for chartered accountants Kingston Smith, says it will still be quite difficult for some company owners to make pension contributions under the new rules because they tend to pay themselves in dividends rather than with a large salary. This is because dividends are taxed at 32.5% rather than the 40% for higher rate tax-payers. “A company owner’s total package might be £100,000 but if £80,000 of this is dividends and only £20,000 salary, he won’t be able to make a £100,000 contribution to his pension but just £20,000,” he says.

McPhail at Hargreaves Lansdown insists company owners will have a lot more control in channelling money into their pensions as a result of A-Day. “If you can pay up to £215,000 a year into your pension there is a great deal of flexibility there whereas the old rules were more restrictive,” he says.

Under the new arrangements, small business owners will be able to put shares in their own company within their pensions since shares in unquoted businesses are allowed as investments under the new rules.

However, it may not be advisable for most directors to do that, as if you sold the business the money you received from the sale will be locked up within your pension.

You would be only be able to take 25% of your pension as a lump sum at any one time, whereas if you kept the business wholly outside of the pension you would be able to have a big lump sum in your hand and the choice to do what you liked with it.

“I would personally prefer to have 90% of a large capital sum (after business taper relief) than 25% of it and the rest to provide you with an income. I think most company owners will choose to keep these things separate,” says O’Sullivan at Tenon.

For some company directors there will be a sense of disappointment they won’t be to buy exotic investments for their pension funds as a result of A-Day but there is still much for them to contemplate.

“At the end of the day, the point of pensions is to build up a pension pot from which you are going to derive an income when you retire. It was a nice idea sticking it in your wine collection to protect it from capital gains tax but how was it to provide you with an income in your dotage?” asks Bridge at Kingston Smith. “But many people will still have to reassess their pension arrangements as a result of the changes, however.”

Keeping up to speed with the latest developments surrounding A-Day has been almost as confusing as the proposals that are actually being put forward. Individuals with money to invest could be forgiven for giving up on the whole concept, especially after last December’s U-turn. But there’s still a big opportunity for small business owners to make the most of their newfound privileges. It’s understandable if you’re feeling a little bit jaded by it all but the A-Day revolution has only just started.