Christine Senior finds that some SIPP investors are taking the product's investment flexibility capabilities to the limit. But is the adoption of an adventurous strategy a wise move?

There's a wide spectrum among Self Invested Personal Pension (SIPP) providers ranging from those who accept all sorts of weird and wonderful investments in their SIPP wrapper to those who limit the investments allowed to tried and tested assets.

Certainly SIPPS offer plenty of choice to adventurous pension savers who want to invest outside the mainstream. The HMRC rules render certain types of investments off limits because they would not attract tax relief, including fine wine, works of art, yachts, race horses and residential property.

But even with these restrictions, a number of options are open to the more entrepreneurial. Though direct investment in residential property is not eligible for tax relief there are still ways of investing in it via a SIPP, using a collective fund. But fairly strict criteria apply to the creation of these so-called genuinely diverse commercial vehicles. The fund must hold property worth at least £1 million, have at least ten investors and no one property can be valued at 40 per cent of the fund.

From hotels to mobile phone masts
One of the more creative SIPP administrators is TM SIPP Services. Many of the more diverse investments involve commercial property in its widest sense. Director of pension consultancy, Nathan Bridgeman, has seen a raft of esoteric investment ideas used - land, orchards, zoos, museums, caravan parks, pubs, hotels and care homes. These can form part of syndicated property purchases where investors pool their resources to invest jointly in their SIPPs.

One particular scheme had 50 football fans of a professional club pool together to buy its stadium. "The club is run as a separate company outside the pension scheme which pays rent on the ground to the SIPP investors," says Bridgeman. "That is generating a yield of more than ten per cent per annum."

Another of the more quirky schemes he describes is used by farmers in East Anglia who have invested in mobile phone masts. They sell a piece of land to their SIPP, which releases the cash to them, while a blue chip mobile phone company, like Orange or Vodafone, pays the rent to the SIPP on the land for their mast.

Recently, Bridgeman has seen a good deal of interest in loans to unconnected parties. Businesses starved of cash by the credit crunch have been seeking other sources of credit.
"We're seeing people lending money to a company and setting an interest rate of, say, 12 per cent, which generates a higher return for a pension scheme," says Bridgeman.
"That was a big area of uplift of business for us last year."

A smart move?
But the question arises of whether these more unusual arrangements are wise investments for pension savings. Bridgeman says these sorts of decisions are up to the investor.
"Investors have chosen to say 'I'm grown up enough to take these decisions', 'I want to build my pension myself'. That's fine with us. Equally it's fine if they want a professional adviser. If things go wrong, the IFA is taking that liability," says Bridgeman.

Stricter line
IPS Partnership takes a stricter line in its attitude to more exotic SIPP investments. Those investors who can self-certify themselves under the Financial Services Authority's (FSA) criteria as 'sophisticated' investors can make their own decisions. Others must get advice from an IFA before the company will allow it.

Unconnected loans, for example, do raise questions of suitability for pension investment.
"We have seen situations where somebody's SIPP is lending to a friend's business," says Richard Mattison, IPS's business development director. "Because a friend is an unconnected party the loan is perfectly allowable. Is that wise? Is the friend's business going to be able to repay that loan with interest or is it going to disappear down a black hole? That's why we have taken the line we have."

Even so, IPS has seen a number of exotic investments go into its SIPP wrapper. Several of these involve equity investments in unlisted UK companies involved in projects abroad. One built a railway in South Africa to transfer tourists between hotels and golf courses, another (wisely no longer active in this) built office blocks in Dubai, and two others were involved in projects in Spain, one building a supermarket, the other setting up a football five-a-side league.

Unlisted companies aren't universally accepted by all SIPP providers because of the lack of transparency of what the company is involved in.

"Some providers will not allow unquoted shares because there is always the possibility that the person has the money in a company that will then go off and buy a residential property which would then be subject to tax charges," says Andrew Roberts, who advises on pension arrangements for Barnett Waddingham.

Standard Life also takes a more conservative line in what it allows in its SIPP. It does, however, have a big take-up of commercial property investment.

Slowdown
Some recent disasters have dampened enthusiasm for more esoteric investments, according to John Lawson, head of pension policy at Standard Life. One was the collapse into administration of GuestInvest, which allowed people to invest in hotel rooms.

Another was the wind-up of Freedom SIPP. The company arranged SIPP investment in French properties, which were then leased back to a management company and rented out to holidaymakers. But HMRC has ruled the property was residential and not commercial.
"HMRC decided to class them as residential, therefore you don't get tax relief on investment into these properties and there are big unauthorised payment charges to pay on the values of property people hold in the scheme," says Lawson.

But Standard Life does have experience of some more adventurous investments in the form of contracts for difference (CFDs). It will only allow these riskier plays if they are made via discretionary fund managers. CFDs are investments on margin, so investors lay out five per cent or ten per cent of the total value of the shares they want to buy. These highly geared investments ramp up the returns if the share price rises, but conversely multiply losses if the price falls.

Lawson defends his company's ban on clients trading CFDs directly: "We are quite cautious at Standard Life," he says. "We don't want to see people getting their fingers burnt. Our typical client is aged 54. We don't want them draining their pension fund just before they are about to retire."

Suffolk Life also offers a more limited range of options to SIPP investors, though it has accepted some creative commercial property investments in the form of a zoo (park and buildings only), an airstrip and a football stadium.

The company is currently considering extending its range into private companies and gold. But its research has revealed limited demand for more exotic investments.
"In our research with advisers in the SIPP market, the feedback was that, with the exception of private company shares, there was not huge demand for these types of investment," says John Moret, Suffolk Life's director of marketing. "You have to take a commercial view as a provider on what you are losing by not allowing it and what you gain by allowing it."

An ongoing debate in the industry centres on the definition of commercial property. With a resort development which may include hotels, villas, bars and restaurants there is a degree of ambiguity about how HMRC might rule on it, if elements can be bought separately. This is the case with Harlequin Property's overseas developments.
"Where do you draw the line on what is or isn't commercial property," asks Mattison. "We took the view this was commercial, we have since revised our view. We are now seeking further clarification from the Revenue."

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