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Fancy
a SIPP?
SIPPs
are becoming increasingly popular with those who want to take advantage
of their property option. Arveen Luthra
investigates
In
a climate where complaints are rife about no real movement in the
stock market, it is impossible to fail to notice the advantages
apparent in purchasing commercial property through a self invested
personal pension (SIPP). This method of pension provision has grown
in popularity, and is no longer regarded as being for the high net
worth individual.
A traditional SIPP has greatest flexibility as to how retirement
benefits are taken, gives maximum control over investment, continued
investment flexibility in retirement and choosing investment. Such
properties could range from retail premises, office blocks, factories
and hotels, right down to your local cinema.
Benefits
of SIPPs include :
• Tax relief at the highest rate;
• All growth on your investments inside a SIPP is free from
Capital Gains Tax; and
• Contributions made to a SIPP by your employer qualify for
corporation tax relief .
According to experts, total assets held within SIPPs are estimated
to total over £15 billion. SIPP administrators, Personal Pension
Management Limited (PPML) predicts that if 20 per cent of the existing
premium personal pension market moved to SIPPs this year, it would
generate £800 million of new business.
The
well publicised prediction of John Moret, managing director of PPML
and ex-chairman of the SIPP Provider Group, is that the market would
see half a million SIPPs by 2010. Seen as unrealistic by some, this
may now be a real possibility. He claims: “It’s my belief
that in the one per cent world being ushered in by stakeholder,
SIPPs will quickly lose their elitist tag and be seen for what they
are – the most flexible and adaptable savings vehicle around.”
But it is the use of SIPPs in purchasing commercial property that
makes the vehicle particularly attractive. And, the fact that there
has been a property boom of late means that this area of investment
seems to be hugely appealing. Real estate company Baring, Houston
& Saunders has forecast that total returns from the property
market will average 10.9 per cent a year over the next three years.
Their research shows that offices currently remain the most favoured
sector. Similarly, CB Hillier Parker has reported availability of
office space in central London increasing by around 50 per cent
from the end of 2000, and reports a 22 per cent take-up overall.
top
Prior to the 6th of April, there were no borrowing limits placed
on property SIPPs. After this time, the Inland Revenue produced
regulations that set out which investments are permitted in a SIPP.
The regulations state that the amount borrowed to purchase a property
within a SIPP must not exceed 75 per cent of the purchase price
of the property or cost of development, must be secured only on
that property or on any other asset of the scheme, and where the
property is sold, must be repaid on completion of the sale of the
property.
Even with the restrictions, it is not hard to see why this SIPP
option is leading the way. Liam Kavanagh, a SIPP property consultant
at James Hay, explains why: “The SIPP itself is a tax efficient
vehicle which is why owning property in a SIPP is so good. The rental
income that comes back in from either you, as tenant company or
a third party tenant is free of income tax. All the time the capital
appreciation on the building is growing in a tax efficient shell.
Lastly, if you sell it the property, there is no capital gains tax
to pay.”
Joint
property purchase is still a popular choice, and the lure of unlocking
the potential of capital held in your pension has proved enticing.
Professionals like lawyers or dentists pool their pensions in order
to buy or expand their practices through a property SIPP.
Kavanagh says: “There is a whole mixture of people trying to
buy business premises to operate from, people whose businesses are
expanding, but why pay rent to someone else when you can pay it
to your own pension fund? Accountants, solicitors and doctors are
all people who might consider this route.”
Such
professionals often have high incomes, so the amount they can raise
jointly to buy their own property is often high. However, Geoffrey
Pointon, chief executive of pension provider Pointon York, believes
that the prestige of owning your own building may be another reason
for taking this SIPP option: “Location is key. A professional
practice can probably have much higher presence by buying their
building through a SIPP, than it would without this scheme. It can
make a statement about itself with confidence and the members can
afford to own the building because they’ve saved on tax. It
can also have a positive effect on the morale of the staff.”
top
Complications
However spectacular the returns appear to be in a property SIPP,
it’s not all plain sailing. There can be complications when
purchasing the property, and as Cleo Vaugn, SIPP administrator at
Beckett Pension Trustees explains – it’s all in the timing.
“It’s just like buying a house or a flat of your own,
except that the property might be worth millions of pounds as opposed
to thousands. You have to do the normal conveyancing through a solicitor,
get a surveyor, arrange a mortgage. Some are quite straightforward,
or there can be quite complicated ones where there might be two
SIPPs buying a property between them, or a SIPP and SSAS,”
he says.
Mike Morrison, pension strategy manager at Winterthur Life asserts
that retirement could cause complications in a property SIPP: “What
happens if one member either gets divorced and has a pension sharing
offer against them, retires and wants to draw benefit, or falls
out with the other members and wants to take transfer value or dies?
The SIPP administrator would have to pay benefits out to the dependants
or to the individual who is transferring out.”
This is when the IFA needs to get involved. When one partner leaves,
the options vary according to the circumstances; you could bring
in another partner, the partners who are left could pay extra contributions
to build up the liquidity, or you might be able to re-finance. “What
comes out of this is that you want to try and avoid selling the
property,” says Morrison.
Colin Maloney, director of unitised pension development agrees,
saying: “Borrowing is a possibility and it can get untidy at
the end of the transaction. You need to pay careful attention to
detail or you could make a terrible mess which would upset the client.”
However, he adds that, the regulations that govern SIPPs are necessary.
“The climate has changed considerably, but at least you know
where you are with the regulation. When you’re negotiating
with the Inland Revenue on their opinion, it can always be elastic
in both directions.”
Experts
are beginning to take John Moret’s prediction seriously, which
may mean SIPP property purchases may prove an attractive option
in the marketplace.
–
Pensions Age August 2001 –
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