For The Love Of Port

Apologies if it has been raised before, but has anyone been thinking about the appropriately-named "SIPP" due to be introduced in the UK on April 6 2006? This may add something to the buy in bond v buy at auction debate AGAINST my current preferred policy. It seems that from that date we can manage our own "Self-Invested Pension Plan" and stick all sorts in there: houses, art and of course wine.

Maybe some of those port-drinking accountants out there can advise us.

I think this means we could get our pension funds to buy port en primeur (or even older wines) and get 40% back on the purchase price. Clearly there are complications - how the duty will be dealt with and how, in the end, we'll ensure that we can get the wine back out of the fund when we retire (presumably it would belong to the fund and as a trustee we couldn't just drink it, we'd have to sell it to the highest bidder - hopefully ourselves).

Whether we go into one or not it is worth thinking about - even for non-UK people. There already appears to be some speculative interest in good but relatively-under priced wine such as 95, 96 and 02 Claret so this development may marginally distort the worldwide market. However, as JR sensibly implies on her site, buying older top Claret like '82, for example, will be of less use as most of the capital gains have already been made there.

A 40% discount on en primeur wine does load the economics on the buy-early-and-store side.

Somehow, however, I suspect that our abstemious socialist Chancellor is going to find some way of preventing wine-lovers from such a benefit; if it is at the expense of his grandiose and expensive public projects .(He'll probably keep Tony Blair and the right happy by saying that we can do it, but immerse it in so much form-filling it will be impossible to benefit). The last thing we need is to draw his attention to the already-extant benefit to us of wine as a so-called "wasting asset" and therefore as a capital gains tax free investment.

(As ever, I am talking about "investment" here for my purposes in terms of buying now, for pleasure later. I am not an investor in the sense that I never have any intention of actually selling anything - at a profit or not!)

Stuart,

I work in the pensions industry and have been watching this with interest. From what I've heard you can basically "invest" anything of appreciating value in a SIPP providing the trustees of the scheme approve. Given wines status as a wasting asset this may prove difficult.

I have also heard that whatever it is that you buy to invest in your SIPP you must do it on a commercial basis. This may add some costs back in as formal accounts etc would be required - probably involving accountants, auditors.....

The bottom line is that you certainly will not be able to dip into your stock for a quick taste. I'm not sure about your idea of trying to buy back your own stock at the end as you would end up paying the full cash value into your own pension fund plus Duty and VAT. This seems to defeat the purpose. Have I misunderstood what you meant by this?

Anyway, I know some Pension guru's through work and will be asking them whether or not this is possible. I'll post any info I get on this site.

Derek

Derek,

I'd also be interested in knowing how the SIPPS rules can be applied to wine or port - especially as to what happens to my "pension fund" if I die before I can buy it back.

I rather like the idea of receiving money from my pension fund which I can then use to buy wine from my pension fund to give them the cash to pay my next months pension which I can then use to buy wine ... you get my theme here.

Alex

Alex,

If you every find yourelf in a position where you seem to have a self re-generating cellar full of port like you describe then I'm affraid you will already have past over to the other side and will be in no need of a pension!

Derek

Derek Turnbull wrote: The bottom line is that you certainly will not be able to dip into your stock for a quick taste. I'm not sure about your idea of trying to buy back your own stock at the end as you would end up paying the full cash value into your own pension fund plus Duty and VAT. This seems to defeat the purpose. Have I misunderstood what you meant by this?

Derek

Keep us posted!!! A port-loving pension expert is just what we need here.

I realise I can't dip in until retirement . What I mean is at the end. Ordinary pensions go in shares, bonds etc. At the end (retirement) they are (effectively, I think) sold and the cash used to buy an annuity and give a lump sum. For wine, presumably you'd do the same - sell the wine and buy the annuity. What I thought might be possible is that, provided you did so at market value so as not to prejudice the fund (which I know is only held on trust for you) you could buy the wine from your own fund at retirement. You pay the market value for that, but you'd get your own money back (minus a few bits and pieces for accountants etc.) I know its circular, but the advantage is you build up stocks of port over your life with 1. a good provenance (as many do) and 2. get it at a discount of 40%. Maybe I'm wrong.

Stuart,

Here is a simplified example that, I think, illustrates my point.

You buy a case of Noval Nacional 1931 today for £50,000 and invest it in your SIPP. The tax man kindly gives you back 40% of your contribution so the total cost to you is £30,000. You don't pay VAT at this point because the wine remains in bond.

After 20 years your "Fund" is worth the retail value of your case of NN '31 - assuming a simple 100% growth over the 20 years this would be £100,000.

You want to take your pension benifits at this point so you ask your SIPP Trustee to sell your Fund to buy an annuity + a cash lump sum.

At this point you have £100,000 to spend on your pension for an outlay of £30,000.

If you buy back your own fund, it will cost you (at a minimum) £100,000 plus VAT - £117,500.

The total cost to you to have your pension benefits plus the NN '31 in 20 years time is £147,500

Alternatively, if you invested £30,000 of tax free cash in a pension fund and paid £50,000 + VAT for a case of NN '31 today the total cost to you would be £88,750. You would have exactly the same assets at the end of the 20 years with a saving of £58,750. The challenge would be not drinking it during the 20 year period!

The point of a SIPP is that you can invest non-cash items in your fund and enjoy tax relief on these in a similar way to normal cash contributions. The main benefit of this is that you can invest in things that have greater growth potential than equivalent cash investments, such as property, fine art or Nacional '31. However, if you buy back your initial investment at the end it effectively means you are paying for all of that growth yourself with cash that the tax man has already had a slice of.

Please note that I am neither a pensions nor an investment expert and this view is possibly a load of old nonsense - although I hope at least the arithmetic is correct! - ask a Financial Advisor

Derek

That's v. helpful.

As one who does not favour buying in bond because I am convinced it is (apart from top bdx) a much worse investment than shares, I don't want to push the issue. However, for those people that do buy in bond and would have paid the VAT at the end anyway I wonder if it helps? (Do they currently pay VAT on the purchase price or the market value when withdrawn? I don't know) Also, I wonder if there is the option of paying VAT first and storing it unbonded? So much to think about! However, maybe I'll stick to the stock market and blow my lump sum on port in 2030!

Let's see how this pans out.

Stuart

I don't know the exact details of buying in bond or duty paid for investment in a SIPP, but I can comment on buying for future consumption and storing in bond or duty paid.

If you store duty paid, you make up to three payments for the wine (i) the cost of the wine before duty and VAT (say £240), (ii) duty and VAT at the rates prevailing on the day that the wines arrive in the UK (say £10 a case duty and then VAT at 17½% on £250) for a further payment of £53.75; and (iii) the storage fees you have to pay until you decide to drink your wine and then the delivery fee when you decide its ready.

The only difference if you store in bond is that you delay payment (ii) until such time as you take delivery of the wine. You will then pay duty and VAT calculated at the rates in force at the time you take delivery, but applied to the original cost of your wine - suppose the wine had increased in value to £480 per case, duty had risen to £20 per case and VAT had increased to 23%. The payment would then become £20 + 23% x (£240 + 20) = £79.80.

Effectively by storing in bond you are delaying the payment of the duty and tax - good for the cash flow and you can afford to buy more wine. The risk is that the rates of duty and / or VAT increase so you end up paying more for the wine.

If you are looking to buy wine as an investment, it is much better to store it in bond otherwise you will be competing to sell your wine in an international market to drinkers in countries where there may be substantially lower rates of VAT or duty. If you have already paid the VAT and duty, you may be giving yourself an unnecessary cost disadvantage.

Alex

SIPPS have been knocked on the head then - well the bit that would have interested us. I'm pleased in a way as I think this was panning out in a way that would not have favoured us.

Once again the Govt. have been caught on the hop by private accountants being a bit cleverer than them. They haven't used these words but said that the U-turn is:

"a proportionate response to an unintended consequence of simplification." :?

Stuart,

Probably for the best - I started to doubt whether or not SIPPS were going to be a real alternative to traditional pensions when I read somewhere that people were advised not to invest property in a SIPP as it was too much of a risk. If bricks and mortar are not a sound long term investment then I don't know what is - certainly not glass bottles containing volatile liquid!

Derek