Self-invested personal pension funds (SIPPs) are a rapidly growing but still often misunderstood concept within the world of pensions. Yet they are a fantastic innovation that can be used to easily and legitimately invest in a wide range of commercial ventures, boosting the value of that fund. Individuals especially within the business world may be familiar with the concept and many have their own schemes. But even many business people still struggle with the basics of how they work, especially when it comes to borrowing money to complement their buying power.
Taking a typical example of an owner-manager who wants to purchase their commercial premises using their pension fund, this is how the process works.
Firstly, the funds in their existing pensions must be transferred into a SIPP. This makes a wider range of investments permissible including commercial property. Next, a specialist trustee is appointed to administer the fund. This is an important legal requirement and only a small number of companies are licenced to do this.
Let’s assume the property is worth £250,000 and the pension fund has a value of £200,000. The client has 2 possible options: they can simply give the difference to the pension as a company contribution for the member or they can borrow the difference to complete a purchase. Pension funds can also borrow up to 50% of their total asset value from a traditional bank.
The transaction is then undertaken by a solicitor and upon completion, the pension fund owns the property and the business pays rent directly to the pension fund. For the owner-manager, this is an extremely tax efficient way of boosting the value of his pension fund. What is more, capital gains tax will not apply upon any eventual sale.
It is a simply process and a fantastic option for many business owners.
Commercial property is one of the most common investments but they can just as easily be used to invest in anything from hotels to forestry plantations to fish farms to unlisted shares in companies. Such deals are easy to set up and exist within a robust legal framework that protects you and your pension. Good advice from professionals is critical. But if done correctly, a little innovation can reap substantial rewards.