Flexibility is the new king

This article is part of
Self-invested Personal Pensions - April 2014

While the industry waits (and waits) for the final capital adequacy rules for Sipps to be published, many operators have begun changing their propositions in preparation. One area that has been impacted is commercial property held as a Sipp asset. As soon as the FSA mooted commercial property being classed as ‘non-standard’, providers reacted to the likelihood of having to hold more capital.

Holding commercial property in a Sipp is an essential financial tool for the self-employed. Businesses looking to secure their own premises have been the typical Sipp commercial property investor. As have those who already own premises but need liquidity to develop their business.

Fuelling the trend

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The economic downturn has fuelled this trend. Advisers will be familiar with countless cases where good companies are presented with a strong business opportunity but cannot get support from the bank. Or where directors are being asked to provide personal guarantees in order to simply maintain current levels of bank support. Or where directors pass up a business opportunity to grow and create jobs because of their low level of confidence in dealing with banks. In all these circumstances, a commercial property Sipp solution can let advisers prove their worth to clients by creating efficient and effective business solutions to real commercial problems.

Take a deeper look at the financials and it is easy to understand how Sipps and commercial property became the best of bedfellows. The income and capital gains tax exemptions afforded to Sipps marry almost perfectly with an income-producing, possibly capital-appreciating asset. Rent that was paid to a landlord can now be paid to their own retirement fund.

From the adviser’s perspective, commercial property could also prove valuable due to the related advice opportunities that went hand-in-hand. Whether it is a succession planning exercise or a recommendation on how to invest accumulated rent.

As providers change commercial property propositions in response to the anticipated changes in regulations, what does this mean for advisers and their clients?

Some providers have reacted by hiking their fees - perhaps prematurely - as we await the final capital adequacy rules. Another provider has stopped allowing mortgages on commercial properties in response to a ‘challenging property market’.

Increased liquidity requirements have also been witnessed. Either through minimum cash balances and percentage limits on illiquid assets being imposed or increased. There is a fine balancing act in ensuring a sensible element of liquidity exists to meet expenses and contingencies while not impacting the buying power of the Sipp investor unnecessarily. In a sustained period of the base rate hovering at next to nothing, there is an understandable reluctance to overcommit to cash holdings. One provider is also considering imposing a minimum value for any commercial property purchase.

Selecting a commercial property Sipp provider is now a little more complex. Generally, the long forecast market consolidation among Sipp operators will finally crystallise (to use a pension term). The pace is accelerating and so advisers are likely to have a reduced choice of operators to recommend. Those looking at a more complex property transaction, possibly containing a ‘job-related’ residential element or joint ownership structure, will have an even shorter list. But the reduced market, which should make the selection process easier, is being offset by these layers of red tape being introduced.