Financial services commentators roundly defended the importance, for the vast majority of people, of using a pension as part of their retirement planning. There have also been many articles warning of the risks associated with the belief that ‘my home is my pension’, pointing out some of the issues of the nest egg actually being the nest.
In any case, it does not have to be a choice between a pension or property investment. A ‘best of both worlds’ scenario of investing in property via a pension does exist. Although residential property is not viable in a self-invested personal pension, investment can be made in commercial property. Given the many benefits a client can derive from property investment, such as tax-free rental income, improved cash flow, or inheritance tax exemption, holding property can be a fundamental element of retirement planning.
Dealing with complexity
There are collective investments on the market, such as property funds and real estate investment trusts, which may be suitable for general investors, can offer exposure to property investments, and avoid direct ownership of property by a pension.
However, advisers who are operating in the higher net-worth area of the market and are au fait with using bespoke Sipps will be familiar with scenarios where a client is looking to purchase a very particular property and whose requirements necessitate a higher level of expertise.
Mr Haldane’s comments were not the first time his views on retirement have made the news this year. In May, he suggested pensions were overly complex.
There is no denying that the constant changing of pension rules has not helped the aim of delivering simplicity, but it can be argued his suggested alternative of property purchase is also far from simple. That is why most of us will employ the services of solicitors and surveyors to see us through our house-buying transactions.
The same is true of property purchase via a Sipp. There can be some complexity, but the adviser and client needs to select a Sipp operator who has the experience and expertise in which they can put their trust.
Sipp shake down
The Sipp market is shaking down into those that are offering low-touch, straight-through processed propositions giving access to listed investments, and the more traditional bespoke Sipps whose propositions allow acceptance of a wider range of investments, including property.
Bespoke Sipp operators have been challenged by the FCA’s higher capital adequacy requirements in cases where non-standard assets are held. And while property may be interpreted as being a standard investment under FCA guidance, advisers should consider selecting a Sipp operator that has sufficient capital adequacy to withstand properties being classified as non-standard.
Experience and expertise counts for a lot, as every property transaction will be different.
The fine print
There are situations where the rules are not definitive. A pension investing in residential property will incur substantial tax penalties, so this needs to be avoided, but what does ‘residential’ mean? Phrases such as ‘when it is suitable for use as a dwelling’ are used, but they still require interpretation of the facts and circumstances of an individual case.
It does mean, though, that a Sipp can invest in the development of residential property provided it disinvests prior to the property becoming suitable for use as a dwelling. The key is knowing where the boundaries lie.
Experience and expertise is also required to avoid falling foul of tangible, moveable property rules, which, if invested in again, incur significant tax penalties. For example, this could involve knowing when machinery is deemed to be part of the fabric of a property or land, as opposed to being moveable property.
For the Great British Bake Off aficionados, facilitating property purchases via Sipps, Family Sipps or small self-administered schemes is a bit like the technical bake; you are given the ingredients and a basic recipe but it takes experience and expertise to deliver the right result. Getting it right means you can have your cake and eat it.
Robert Graves is head of pensions technical services at Rowanmoor Group
