Retirement planning can be complex and inflexible with a lack of control and personal choice. The required contributions to build a fund in order to provide the desired level of income in retirement can be unaffordable and the performance of traditional equity (stocks and shares based) funds provided by insurance companies hasn’t been great along with the volatility of those funds.
Although most people have heard of the term SIPP there has been much confusion about what can or cannot be invested in a Self Invested Pension Plan and who can benefit from such a scheme.
A SIPP essentially can help you take control of your existing and future pension provision. A SIPP can buy property. It can borrow up to 50% of its net assets in order to fund a property purchase regardless of the investor’s status. You can start a new plan and consolidate your existing pension arrangements in to a new SIPP. There are a number of specialist SIPP providers whom accept overseas property as an acceptable asset.
Not just any overseas property can be purchase with a SIPP – only “Hotel Based” property which, has been deemed by Her Majesties Revenue & Customs (HMRC) as commercial. SIPP investors are not allowed to use their property personally. The property is deemed a “pure investment” and not a holiday home or lifestyle purchase.
An investor using a SIPP can make further contributions ongoing into their SIPP and is entitled to full tax relief which means that if a 40% tax payer paid in £100,000 it could only cost him £60,000. It is also possible to increase the amount of funds available in a SIPP by borrowing up to a further 50% of the value of the SIPP. For example if a SIPP has funds of £200,000, it can borrow another £100,000 making available £300,000 to invest.
Since pension rules were simplified in April 2006 the benefits of SIPP’s have become accessible to the wider , further still since October 2008 when HMRC allowed contracted out/SERPS monies to be accessible unlocked an estimated £50million in pension funds to the UK public that otherwise remained locked in until retirement.
So what are the benefits of investing in property with a SIPP?
- No requirement for cash investment, so no effect on your current expenditure
- Tax Relief on eligible contributions at your highest rate, max 40%
- No Capital Gains Tax on property investments within a SIPP
- No Income Tax on property investments within a SIPP
- No dividends to be taxed on property investments in a SIPP
- Potential Inheritance Tax benefits
- Pre-agreed limited liability lending
- A SIPP can be syndicated so two or more people can pool their pension funds to invest in overseas property – ideal for a husband and wife or group investment.
Any type of pension can be transferred into a SIPP, for instance many people have several ‘frozen’ pensions from previous employment or businesses and/or personal pensions that they can transfer into a SIPP. Two or more people can create a group SIPP known as a Family Pension Trust (FPT) which could be ideal for husband and wife investment.
SIPPs are allowed to invest in the following.
- Stocks and shares listed or dealt on an Inland Revenue recognised stock exchange, including AIM
- Unit trusts, open ended investment companies (OEICs)
- Warrants, covered warrants
- Government stock and fixed interest stock
- Un-quoted shares
- Commercial property
- Overseas Hotel Rooms
- Property funds
Initially, the Government was going to allow personal pension funds to invest in residential property and this created considerable interest from investors. However in December 2005, the Chancellor announced a U-turn and the government backtracked. This has lead to confusion on the subject and it is apparent that some people do not know that they can in fact hold overseas property (hotel rooms) within a SIPP.
Hotel rooms are classed as commercial property, whilst most people don’t have a fund big enough to buy commercial units such as an office building or a warehouse. Hotel rooms however offer a different option:-
Hotel units are usually categorized as SIPP compliant if they adhere to the following statements:
- The investment is clearly a hotel room.
- The buyer has no personal usage of their room or any other room. (Unless they pay normal market rates).
- The investor gains no personal benefit other than from room rental back into their pension fund i.e. no income share from hotel bar or restaurant.
- The investment is in no way a residential property.
- The unit does not have a kitchen.
It is advisable to take advice from a financial adviser when considering purchasing through a SIPP. ROC can introduce you to an independent pension specialist for this purpose.
Purchasing property maybe something you have not previously considered but the ability to now access investments using pension funds could now be an option for you without the requirement for ANY further cash investment. To discuss our SIPP approved projects contact us.
Continue Reading