Low interest rates, gilt yields and annuity rates, stock market uncertainty and an ageing population are putting increasing pressure on pension schemes. Defined benefit (DB) scheme deficits prevail, with some reports suggesting there is only a 50:50 chance of a DB scheme delivering its promise.
These things are a big concern to many. A DWP consultation, Security and Sustainability in Defined Benefit Pension Schemes, is in progress and might potentially allow schemes in difficulty to alter their benefits promises.
Higher transfer values are also adding inflows into already huge money purchase schemes and, with retirement flexibility and attractive death benefits, more people are taking responsibility for their own retirement income. Investing in commercial property could be a partial answer to the problem.
Before retirement, people are increasingly caught by the £40,000 annual allowance cap, £10,000 tapered annual allowance and money purchase annual allowance at just £4,000 a year. Rental income to pension funds is outside annual allowances. Is it a way to get excess contributions in?
In retirement, many do not want to risk the volatility of markets or like being locked into low annuity rates or low cash-based returns. However, they still want inflation-hedged growth and sustainable income after they have stopped working. In the words of Mark Twain: “Buy land, they’re not making it any more.” Property is benchmarked to the economy, interest rates and inflation, so provided you secure the right commercial property, it might be an income winner.
There are plenty of tax reliefs available with this asset class, including the usual income tax and corporation tax relief on contributions, plus capital gains tax-free growth and no taxes on rental income to the pension fund. My pension fund owns offices, with my limited company as the tenant.
My company pays rents to my fund without any annual allowance restrictions and with the bonus that those rents are offset to corporation tax. In addition, the tenancy agreement is a full tenant repair and replace, which means my company funds any repairs, and with upward-only rental reviews my fund has an assured income stream.
It makes perfect sense for advisers, let alone clients, to consider commercial property investment.
Financial advisers should be aware of the above and of the differences between small self-administered schemes (Ssas) and self-invested personal pension (Sipp). However, the table offers a reminder of the similarities and differences between them.
|Occupational scheme rules||Personal pension scheme rules|
|Usually directors/employee members of the sponsoring employer||Private, personal scheme, but can accept employer contributions|
|Notional share of the pension scheme funds/assets||Scheme in your name, but multiple Sipps can buy assets together|
|Loans allowed to sponsoring employer||No loans to connected parties (people or companies)|
|100% of fund value can be invested in unconnected company shares, 5% of fund value can be held in sponsoring employer shares with no more than 20% of total fund value (at time of share purchase) in a range of sponsoring employers||100% of fund value can be invested in company shares, including connected companies, but cannot own 100% of a company if that company is member-controlled, nor usually have more than a 70% of the fund in any one company share subject to Sipp manager approval|
|Commercial property, not residential||As per Ssas|
|Can borrow up to 50% of the fund value as a pension mortgage||As per Ssas|
|High/more complex administration involvement for member trustees||Lower administration burden, but Sipp manager must approve investments|
With commercial rental yields of about 8 per cent to 10 per cent a year, this makes it an inflation hedge as prices rise. And with commercial property prices quite low, now might be a good a time as any to consider property, not just for clients, but also our own portfolios.
That said, you cannot simply rush out and buy the first commercial unit you find. You need to take many factors into account when assessing a suitable purchase.
Location obviously has some impact, but take a walk down some high streets and see how many premises are empty. There are clearly reasons why these are not tenanted and that is not just the growth in online shopping or an economic downturn. Below are details of issues to consider.