Pension Planning and Self Invested Pension Plans (SIPP)

Buying great investment property through your pension fund

Author: C Metalle - August 2009

The rules which govern what sort of property investments one can place into a personal pension plan such as a SIPP in the UK (Self Invested Pension Plan), a 401K in the US or, for Europe, a QROPS (Qualifying Recognised Overseas Pension Scheme) are not well understood by many so we've written this article to help people understand the rules a little better. It will also look at ways in which investment property can be used for a pension plan even where the property itself may breach the rules.

Basically, in the UK at least, the government encourages its populace to invest for their retirement by providing tax-efficient investment schemes to be used as pensions.  However, they also place restrictions on these schemes to avoid people using the tax-man's generosity to buy assets which are, or could be, for personal use - your own home or a holiday villa.This does not preclude investments in property either at home or overseas property investments for that matter.  It just means one has to be careful not to breach the rules and thereby lose all the tax benefits associated with the pension plan.

It can be highly advantageous to have one of these personal pensions and property - especially high yielding property assets - can be ideal investments to be included.  The key benefits from such schemes are worth repeating before looking at some of the rules that need to be followed:

    * Freedom to Control Investments

    * Flexibility to access funds

    * No requirement to purchase an Annuity

    * Access to income and capital without deduction of tax

    * Transfer of the fund to future generations upon death

    * Free from UK Inheritance Tax

    * Tax planning

The key rules one has to observe when setting up and using a pension plan to invest in property are:

1.    The investment property purchased must not be "residential" property.

This essentially means that if you are buying property overseas through a pension plan it must not be capable of being occupied as a principal or holiday residence.  On the face of it this might appear to disqualify most overseas property investments but that is not usually the case.  Provided the property is, for example, on a managed resort or in a hotel-type complex and independently managed by a recognised hotel/resort manager it should qualify.  There are many such developments around the world which offer attractive, high yield investment income, sometimes with guaranteed income for periods ranging from 1 to 5 years but you will need to check that the property in question truly hs been cleared for inclusion in a SIPP or QROPS.

2.    The pension beneficiary(ies) must not be able to make personal use of the property.

In other words, you cannot simply buy a holiday villa through your pension fund and then use it to stay in when on holiday.  The property must genuinely be an investment and treated as such, not an asset you gain use of even if it also turns out to be a good investment.Beware, therefore, if buying a property which is used by a holiday resort operator to rent out to holidaymakers if the contract with you allows you any personal use - this will immediately breach the rules set by the tax authorities.

3.    There are rules on how much property a pension fund can own and how much money it can borrow to buy property.

It is bet to check with your financial advisor on this if you are planning to buy suitable pension fund property investments especially if you plan to use a mortgage to buy them as the rules can change from time to time.  At the time of writing this a SIPP in the UK cannot borrow more than 50% of its assets to buy property and no more than 10% of the assets in the fund can be in properties.  But see below for ways around some of these restrictions.

4.    Not all providers have the same rules.

Whilst the overall rules are set by the tax laws you will need to check with your particular pension fund provider on the rules they also set as some will refuse to deal with certain asset classes even if these are technically allowed.

So, how do you invest in high growth or high yield property assets through a pension plan without breaching the rules above?  Whilst one way is simply to make sure you check everything against the rule book, as it were, there is a way some fund managers have developed that brings properties into the fund without many of the restrictions seen above.  This is to do it through a company set up specifically to buy properties (generally called a Special Purpose Vehicle).  The pension fund then buys shares in the company and is thereby investing in shares of an unquoted company, not investing directly into property.

It is still advisable to avoid using the property in question to avoid any potential breach of the restriction on having residential property in the fund but this alternative scheme has a number of additional benefits:

•Worldwide property investments are all potentially available to the pension fund
•Property investments can be split amongst several funds each of which buys shares in the company (fractional investment but without needing the paperwork to buy the property in fractions)
•Properties can be traded within the company to refresh the portfolio rather than needing to trade them within a pension fund
•Larger mortgages are possible as these will be raised by the company not the fund.
Contact us for more information on using your personal pension fund to buy property investments worldwide with high yields, excellent growth prospects and/or guaranteed rentals.

Pension planning and property investment – now it’s tax free too

Author C Metalle - July 2009

Now there is a property-based financial investment, fully regulated by the Financial Services Authority (FSA) and structured to be tax free for those seeking to build long-term value.  And what’s more – the income and capital is all guaranteed too.

This article on the property investment product explains how the scheme works.

So how does it work tax free? 

As the ownership is held in a trust all income into the trust is, of course, tax free.  If this income is then distributed as ash payments to the beneficial owners then tax is payable. However, if the income from the rentals of the property is retained in the trust it can be used to buy more investments in the scheme and thus build value totally free of tax. 

As these properties are generally higher yielding – up to 18% in some cases – the effect of reinvesting and achieving the compounding effect (you earn income in year 2 on the original amount invested plus the reinvestment made at the end of year 1 and this compounding continues every year) is very marked:

If you invested £25,000 and achieved 10% value growth per annum and a 10% per annum yield the figures would look like this:

The value of your property at the end of 10 years would be £63,843

Your net of tax income for the 10 years would have totalled £19,771

If you left the cash in the trust and reinvested it into further property assets yielding 10% and growing in value at 10% annually, as per the original investment the figures would be:

The value of your property at the end of 10 years would be £115,024

Your net of tax income for the 10 years would have totalled £0

In other words, the compounding effect has added around £30,000 of value to your investment in 10 years – a handy way to build up that pension fund.

If Albert Einstein really did declare compound interest to be the 8th Wonder of the World then he seems to have been right!

Of course, if you make the original investment through a Self Invested Pension Plan (SIPP) you get a 40% discount on the original investment too.

For those of you looking for ways to build up a pension this has to be a neat option

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