Is it time to revisit Sipp borrowing limits?

Gareth James

Gareth James

Self-invested personal pensions (Sipps) have long been associated with the direct purchase of commercial property.  

In fact if you were to ask those who have been involved with Sipps for more than a decade, a reasonable number might say a pension scheme was not truly a Sipp unless it offered the option of direct access to commercial property.

While this is not a view I’d support, I am long enough in the tooth to remember the days when a significant minority of Sipps were set up to purchase commercial property, before the growth in popularity of online investment platforms led to the establishment of large numbers of stock market-based Sipps.

The explosion of growth of online platforms was not the only factor which led to property purchase forming a less significant part of the Sipp market. Changes to the rules governing property purchase borrowing in 2006 made it much harder for many to come up with the funds required to buy a property.

Before 2006, Sipps were allowed to borrow up to 75 per cent of the value of a commercial property, so someone with pension funds worth £100,000 could potentially purchase a property approaching £400,000 in value.

From 2006, the limit on Sipp borrowing was reduced to 50 per cent of the value of the pension scheme. So individuals with £100,000 in their Sipp suddenly saw their capacity to buy a property reduced from approaching £400,000 to £150,000.

Unsurprisingly this led to a huge surge in property purchases just before the limits changed in 2006 under the old, more generous, limits.

A few factors are now making me wonder whether re-visiting this limit might be a good idea.

Firstly, I suspect it has now largely been forgotten that the borrowing limit was reduced in anticipation of residential property purchase being allowed under Sipps, amid fears that the higher borrowing limit could overheat the residential market and expose investors to too high a risk.

Although it did not take effect until 2006, the reduced borrowing limit was actually set a couple of years earlier, well before the December 2005 decision to close off the option of Sipps buying residential property.

If the lower limit was primarily introduced to limit potential problems linked to an asset class that was never available to Sipps, is it needed?

Secondly, there is no real evidence of the higher borrowing limit causing issues in relation to commercial property purchases.

Sipps had been able to borrow at the old limits for many years before 2006. We then had the rush in purchases shortly before the limits changed, and this was followed within a couple of years by a catastrophic economic event that had a significant impact on commercial property, but this was not followed by Sipps and small self-administered schemes failing through overexposure to the market.