A rise in self investment

There has been significant growth in the number of self invested pensions being arranged during the past year and much of this could be due to changes brought about by Gordon Brown (who has subsequently move on to another job in government) when he was Chancellor.

The changes brought about in April 2006 as the result of a review of the way pensions work was intended to lead to simplification of the rules in order to increase the level of individual retirement planning. Whether the new regime is any easier to understand is open to question, but for most people, the amount they can contribute towards a pension is much greater than before and removal of the prohibition on transactions between members or employers and the pensions scheme itself could make it even easier to use a self invested pension as a way of purchasing commercial property.

Purchasing commercial property
For many businesses, having a dependable base of operations is essential. Many businesses can have considerable amounts of plant and equipment that would need to be re-located should existing premises suddenly became unavailable; and even for office-based operations, the benefits of remaining in location for a long period can be great.

The problem is that firms which rent accommodation have very little control over the level of rent they pay or even whether it will be possible to stay in situ, or will have to move. Buying the premises can be a way of securing a long-term base, as well as representing a potential investment. Unfortunately, many businesses may not have the money to make the purchase alone.

Using the pension
Self invested pensions – whether a self invested personal pension (SIPP) or a small self administered scheme (SSAS) – can hold commercial property as an asset. They can also borrow up to half their value in order to make a suitable purchase; so a pension fund worth £500,000 could make a property purchase of up to £750,000. Transfer values from existing pension schemes into a SIPP or SSAS can be used towards calculation of the net value and while a SSAS can have up several members – which means that the fund should be quite large – SIPPs, which normally only have one member, can act together to purchase commercial property.

It is also, thanks to the changes made in 2006, possible for the firm and pension schemes jointly to purchase commercial property; previously this would have been a prohibited “connected parties” transaction. The same applies to the member making a direct contribution towards the purchase (and there is no limit on the borrowing for members and employers, just for the scheme itself). This makes even more substantial purchases viable.

It is also worth noting that rent payable to the pension scheme can be in excess of the normal annual allowance limit on contributions (set at £225,000 for 2007/8 and rising thereafter). However, there is also a lifetime limit on the total size of the pension fund (set at £1.6 million for 2007/8 and rising thereafter), which may influence investment decisions.

An exit route
Most importantly, removal of the ban on connected party transactions means that the pension could sell (its share of) the property to the company when the member comes to retire, if required, helping to realise cash and keep the property “in the family”.

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