Critics have expressed concerns about a a property investment firm’s marketing flyer which promotes cashing out a pension to buy a property but fails to give any warnings about the cashing-out of the investment itself.
FTAdviser has seen marketing literature from unregulated firm Select Pension which appears to promote property investment to consumers to enable them to “benefit from the government’s 2015 pension changes”. However, the flyer contains no warnings about the pitfalls of cashing-out into a property.
Under a ‘Why Vita Student?’ sub-heading, the flyer says that investors will receive a minimum 7 per cent net return for five years; that completion dates are in line with the government’s 2015 pension changes and that the property can be purchased in a family member’s or company name.
Claire Trott, head of technical support at Sipp provider Talbot and Muir, said: “I am concerned that this appears to be targeting and encouraging people to cash in their pensions in order to buy a student property.
“There are a good number of risks associated with this, not to mention the withdrawal of pension funds that will incur marginal rate tax, which could easily push them into the higher rate bracket for a year and future returns will also be outside the tax exempt pension environment.”
According to David Trenner, technical director at adviser Intelligent Pensions, marketing flyers such as this should contain several risk warnings.
It should highlight that taking money out of your pension fund to invest in property could cost you 45 per cent tax after the initial 25 per cent is tax free; property prices can fall as well as rise; student tenants are not guaranteed and may not need the property for 12 months; and also the fund will incur costs in managing and maintaining the property which will restrict returns.
Mr Trenner added that property is very illiquid and there may be times when capital cannot be accessed.
Andrew Tully, pensions technical director at provider MGM Advantage, told FTAdviser that, according to Financial Conduct Authority regulations, firms must ensure a financial promotion makes it clear that a client’s capital is at risk.
Yield figures must also give a balanced impression of both the short and long term prospects for the investment, he added.
While there is nothing wrong with investing in student property, people must be aware of what they should consider prior to cashing in their pension, Mr Tully said. “So they are immediately at a significant tax disadvantage compared to someone staying and investing with the pension.
“Any income generated outside of a pension – such as these properties – is taxable in the hands of the individual. An investment made within a pension wrapper is generally free of tax.
“While it may suit some, people should take independent financial advice before deciding whether to invest in a scheme like this.”
Mr Tully also pointed out that a particular residential property in a particular city could be an illiquid asset, so people may not be able to sell it when they want to, potentially reducing flexibility on how and when they can take income.
FTAdviser learned about this proposition through a provider firm who received the flyer.
Select Property did not comment on the risk allegations, but did tell FTAdviser it does not send out blanket, unsolicited communications.
Giles Beswick, director at Select Property Group, said: “Vita Student is a fully managed property investment that delivers rental returns at a level which exceeds many other buy-to-let property investments.
“Select Property only market to consumers that have expressed an interest in investment property. We do not send out blanket, unsolicited communications.
He added: “Vita Student could be considered an appropriate investment for anyone that is researching the property market to identify opportunities that achieve a high rate of return from an investment in property as an asset class.”
The criticism follows research by Intellifo in November this year which suggested that three quarters of financial advisers believe that some of their clients will wholly cash out their pension when they are given the freedom to do so from next April.
ruth.gillbe@ft.com
