So, can you use your pension to invest in property or a business? In a word, yes.
James Naismith, a Canadian, is widely credited for creating the game we now know as basketball circa 1891, using peach baskets as ‘nets’. However, initially the game was slowed down every time a basket was scored, as play stopped to retrieve the ball from the net. A major advance was made sometime between 1906 and 1912 – depending on which source you believe – when someone had the bright idea of using a net hung from an iron hoop with – crucially – a hole in the bottom for the ball to pass through, letting gravity take it to the floor.
It’s a solution that seems obvious now, although it still took a few years from the invention of the game for the idea to really take hold throughout the sport.
In the same way, it’s taken a few years for the true potential of Self-Invested Personal Pensions (SIPPs) to be realised around the country. The first SIPP written was in 1990, following Nigel Lawson’s budget of 1989 - although for a variety of reasons they didn’t really take off until the mid to late 90s.
I mention this not only because I have a somewhat unhealthy obsession with the history of pensions, but because a SIPP is the primary pension type through which individual savers can use pension funds to purchase a commercial property.
The benefits of using your pension to invest in property
For business owners, using pension funds to buy a commercial property – particularly a property from which their own business trades – is a tax planner’s eutopia.
For a start, funding a pension is a fantastically tax efficient way of extracting funds from the business. Pension contributions are deducted from the top line before the application of Corporation Tax (so an initial enhancement of 19%) and they are not considered an employee benefit, so no income tax or National Insurance is applicable either.
Once the SIPP uses the accrued fund to become the owner of the property, rent is payable into the pension and is treated as investment growth – meaning it is tax free. It’s also another efficient way of extracting funds from the business, under the control of the owner, without a tax penalty. Depending on the property, VAT may apply to a property purchase price and rent, but this is fully reclaimable by the SIPP, so the funds are not lost.
There are other benefits too; a SIPP is an entity in its own right and can be used to borrow – up to 50% of its own value – in order to fund a property purchase.
By holding a property in the SIPP, the pension may also provide funds to the business. If the business is the vendor of the property, then it will receive the funds for the purchase price. If the business owner is the vendor, they receive the purchase funds.
Of course, this strategy is not restricted to business owners. Many others may like the idea of using pension funds to buy a commercial property for normal investment reasons, and to benefit from the tax efficiency a pension provides.
But just as I get carried away with myself, I should note that nothing is ever 100% clear cut. Buying a property brings with it the normal risks of property ownership – such as maintenance, dealing with tenants, fallow periods, illiquidity, high initial purchase costs and so on. A SIPP is also still subject to the rules governing pensions, which puts a cap on how much can be funded in any given year, how much can be accrued without penalty over a lifetime, and the age at which benefits can be drawn. That said, for many savers – particularly those that trade from a set location, using pension funds to buy a property is an obvious choice, just like cutting the net was all those years ago.
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We need to look at Self-Administered Schemes too
In basketball, a backboard was added – surprisingly perhaps, before the thought to cut a hole in the net – not to aid players, but to prevent interference from spectators.
Similarly – in the more exciting world of pensions – we should consider the role of a Small Self-Administered Scheme (SSAS). Just as the backboard came before the cut in the net, the SSAS came before the SIPP, dating all the way back to the Finance Act of 1973.
The SSAS is relevant because it allows direct funding to a sponsoring employer – for instance, the SSAS saver’s own business – to a significant degree. A SSAS can loan a sponsoring employer up to 50% of its net value, or 95% to an unconnected party.
As an aside, a SSAS can be used to purchase a commercial property too, but as it is a self-administered occupational scheme, the responsibilities of the trustees – the savers – is that much more involved. Thus, a SIPP provides an easier way to purchase a property if a loan back is not required.
But, I am venturing into the nuances of pension regulation. It’s an area I specialise in – seriously, catch me at the bar I’m a hoot – but I should concentrate on the matter at hand. Is using my pension to invest in property or businesses a reality? Yes, obviously.
Written by Tom Parry APFS, Independent Financial Adviser/Chartered Financial Planner, Integrity365
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