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Nest egg: the benefits of property investment through a pension fundBy: Steve Woodham, Old Mill

Steve Woodham, Old Mill

UK pension funds are permitted to purchase and invest in an extended range of properties both in the UK and overseas. The type of pension vehicle that can be used for direct property purchase is Investment Regulated Pension Schemes, which are commonly known as Self Invested Personal Pension (SIPP) for individuals, and the Small Self-Administered Scheme (SSAS) for companies.

These pension vehicles can be particularly useful for owners of businesses, who can buy their business premises through their pension funds and benefit from attractive tax advantages. Contributions paid to the pension fund attract tax relief, rental income received is free from income tax, and when the property is sold by the pension fund there is no capital gains tax payable. In addition business cash flow can be increased by purchasing a property from an employer or member and the property will form an asset of the pension fund and therefore creditors of the business will not have access to it.

Someone with their own business might decide to use the business property assets - such as offices, factories, agricultural land and warehouses - as part of a retirement nest egg. In this case, they would pay rent directly into their own pension fund rather than to a third party. The property can also be let to third party tenants and the pension fund will benefit from the rental yield. There are no restrictions on who can be the tenant. However if the tenant is connected (eg. an individual or business connected with the member), the rent payable will need to be independently assessed by a qualified surveyor.

Most commercial properties including Hotels, Public Houses, Halls of residence, Nursing Homes, Hospitals and land whether developed, farmland or forestry can be purchased via a pension fund however the regulations usually do not allow pension funds to invest in residential properties.

There are a number of ways in which a pension fund can fund a commercial property investment including payment of cash contributions to a pension fund, unlocking existing insured pension fund contracts and borrowing in the usual way. It is also possible to transfer property that is owned either by the company or an individual into a pension fund to benefit from the tax advantages.

The property is usually owned and registered in the names of the trustees of the pension fund. However, it is also possible to jointly own the property, this means more than one pension fund can join together to jointly purchase a property or the property can be purchased jointly with any other party.

It is important to consider some of the downsides of property investments by a pension fund including:

  • Cash flow of the pension fund should the need arise to pay benefits early
  • Property returns - prices can fall as well as rise
  • Rental incomes are not guaranteed
  • Commercial property is regarded as a higher risk than residential property
  • If the property is overseas, fluctuations in currency will have an effect on the value of the property and rental income
  • There are additional professional costs associated with a property purchase.

Additional funding may be required to ensure the pension fund has sufficient liquid assets to make pension and lump sum payments on retirement, this can include the inclusion of additional members and the pooling of assets within the fund. If there is a shortfall the Trustees can consider borrowing to pay benefits to the members.

This is a highly specialist area and there are risks that should be considered when buying and managing property. 

About the author

Steve Woodham is a Pensions Manager with Old Mill Pensions Consultancy, the specialist pension team within Old Mill Financial Planning. Steve joined Old Mill in 2006 and has 23 years experience in the field of self invested pensions. Steve is a keen golfer and is captain of the Avalon League Team. He also plays trombone in a local Soul Band

Features September 2012

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