Having your cake and eating it

This article is part of
Sipps – October 2016 special report

In August, Bank of England economist Andy Haldane created something of a storm by suggesting property was a better investment for retirement than a pension.

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.

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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.