TT63: Personal Pensions & Property

Owner-managers of businesses have often used a company Small Self Administered Scheme (“SSAS”) to make company pension contributions into their plan to invest in commercial property; other individuals can do the same with their personal pension scheme by starting a Self Invested Personal Pension (“SIPP”).

The investments within existing personal pensions can then be transferred into the SIPP and converted into cash, which can be used to buy commercial property. It is also possible for both these schemes to borrow money to make such investments, or to make pooled investments to jointly own property between several SIPPs. However, while commercial property is allowed, residential property is not.

Changes from 6 April 2006

From this date (known as “A” Day) a new “simplified” regime for all pensions starts. A key change is that under the new regime investments in residential property will be allowed. Numerous articles have been written in the press on this subject and at Barnes Roffe many questions have been received. A summary of the relevant SIPP changes follows (current rules red, new rules black):

  • Only commercial property can be bought within a SIPP.
  • Any type of property will be able to be bought, and even otheritems such as classic cars or art will be eligible.
  • The SIPP can borrow up to 75% of the value of the property, so long as the forecast for the investment’s rental return and the pension contributions will pay off the loan by retirement date.
  • The new schemes will only be able to borrow a further 50% more than the cash invested by the scheme, i.e. only 33% of the property value to be purchased.
  • A SIPP can only buy from an unconnected third party.
  • The SIPP will be able to buy assets held by connected people – including you!
  • Overseas property has historically not been available.
  • No assets are prohibited, but costs must be considered and also overseas legislation might not interact well with UK Trust law.
  • SIPPs can be grouped together to combine buying power, e.g. to jointly buy a property with associates. Certain syndicated SIPPs are available in the market.
  • No change, but the borrowing power will be reduced.
  • Contributions are limited by a link to earnings in the year (or best out of the previous five years) multiplied by an increasing % based on age (up to 40%).
  • Contributions will be limited to 100% of earnings for the year, subject to a maximum limit of £215,000 in 2006/07, rising to £255,000 in 2010/11.
  • No maximum fund value.
  • Funds in excess of £1.5M (2006/07), rising to £1.8M (2010/11) will be taxed on retirement at 55%!
  • 25% of the fund can be tax-free cash on retirement.
  • No change.

Barnes Roffe Topical Tips

  • Review your pension arrangements to see if it is appropriate for you to accelerate any decision to use the higher borrowing rules before 6 April 2006
  • Consider whether you need to make protection elections against the new rules limiting the ultimate size of your fund – and to ensure you have flexibility going forward that does not jeopardise your elections
  • Remember the risks if you have a substantial amount of your pension tied up in one asset class (e.g. property)
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