As tax-year-end approaches, financial advisers are sharpening their focus on pension planning – and for good reason. Pensions, especially Self-Invested Personal Pensions (SIPPs), offer some of the most generous tax advantages available.
When it comes to estate planning, SIPPs remain one of the most tax-efficient vehicles for wealth transfer – sitting outside the estate for inheritance tax purposes – at least for now.
SIPPs are an essential tool for tax-efficient pension planning.
Pension Allowance
With the tax year-end in sight, advisers should urge clients to make the most of their annual pension allowance – currently £60,000 for most individuals.
Using as much of this allowance as possible can significantly boost a client’s retirement pot while generating substantial income tax relief.
Moreover, if a client hasn’t fully used their allowances in recent years, they can carry forward unused amounts from the previous three tax years.
This carry-forward rule enables high contributions in the current year above the £600,00 limit, potentially up to £180,000 in total (across current and past allowances) without attracting tax levies.
Salary Sacrifice
Another valuable tactic is Salary Sacrifice, which can maximize contributions while reducing tax liabilities for both employee and employer. Under a salary sacrifice arrangement, an employee agrees to give up part of their salary, and the foregone amount is paid directly into their pension by their employer.
This is highly efficient because the sacrificed portion avoids both Income Tax for the employee and National Insurance contributions (NICs) for both the employee and employer.
For advised clients, salary sacrifice can be a win-win: their pension pot increases at no additional cost to the employer, and their net income can even increase due to tax/NIC savings.
Inheritance Tax
Advisers have long appreciated pensions as a powerful tool in estate planning. Pension pots, including SIPPs, currently sit outside the client’s estate for IHT purposes, meaning they can be passed to beneficiaries without incurring the 40% tax that might apply to other assets.
In fact, under current rules, SIPPs are not subject to IHT at all. This creates a compelling strategy: clients can draw retirement income from other investments or ISAs and preserve their pension for as long as possible, so it can be left to heirs’ tax-efficiently.
However, while yet to be finalised, Chancellor Rachel Reeves’ plan to no longer exempt pensions from IHT from April 2027, could bring pension funds into the taxable estate at death.
For the next two tax years, at least, advisers can continue to incorporate pensions in estate plans, albeit with a note of caution.
Holding Commercial Property in a SIPP
One of the distinctive advantages of a full SIPP is the ability to hold commercial property within the pension. For business owners and property investors, this opens up perhaps the most tax-efficient way to invest in real estate. The benefits are striking:
- Tax-Free Rental Income: Any rent paid by tenants (even businesses) into the SIPP is completely free of Income Tax. The rental income accumulates in the pension, boosting the portfolio’s growth without the drag of tax. For an owner-managed business, doing so is effectively like paying rent to your future self while getting a full corporation tax deduction on the rent as a business expense.
- Capital Gains Tax Exemption: If the property is later sold for a profit, any gain is free from Capital Gains Tax (CGT) inside the SIPP. By contrast, outside a pension wrapper, the rate of CGT on commercial property depends on the investor’s marginal income tax band. Currently, a basic-rate taxpayer will pay 18% on gains from commercial property, while higher- or additional-rate taxpayers face 24%. Moreover, from 6 April 2025, the annual CGT exemption for individuals is set to halve from £3,000 to £1,500, further increasing the tax exposure on non-pension property assets. Holding commercial property within a SIPP removes these concerns over escalating CGT charges, supporting a more strategic, long-term approach to real estate ownership.
- Tax-Relieved Purchase Funding: When buying property through a SIPP, clients can use their pension contributions (and even existing SIPP cash or borrowing up to 50% of the fund value) to fund the purchase. Pension contributions are tax-relieved, so part of the property purchase is effectively funded by what would have otherwise been paid as tax.
Furthermore, holding property in a SIPP insulates it from some other taxes. There’s no ongoing income tax on the rent as noted, and also no inheritance tax on the property value if the SIPP is passed to beneficiaries.
Of course, investing in property via a SIPP must be done carefully. Only commercial property (offices, warehouses etc.) and certain mixed-use properties are allowed – residential property is generally not permitted in a SIPP, except in very limited circumstances, due to heavy tax penalties.
Liquidity is another consideration: property is an illiquid asset, so the SIPP needs to maintain enough cash for expenses and any pension benefits being taken. But with good planning these challenges are manageable. The tax advantages often far outweigh the drawbacks.
Conclusion
For advisers, pensions remain a cornerstone of tax-efficient investing – and SIPPs, in particular, deserve a prominent place in year-end planning conversations.
Whether it’s maximising contributions to capture full tax relief, choosing the right pension vehicle for flexibility and growth, or leveraging regulatory changes and tax rules to client advantage, SIPPs offer an unmatched blend of benefits.
James Floyd, is the Managing Director of Alltrust Services Limited
