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SIPPS: How property could provide you with a pension

By Western Morning News  |  Posted: April 10, 2014

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With news emerging that people in their forties could end up poorer in retirement than their parents, legal and financial experts from two Cornwall-based firms have joined forces to urge investors to take advice.

Experts from Coodes Solicitors and Bishop Fleming Independent Financial Advisers are advising clients that investing in property could give their pension pot a boost for the future.

According to the Institute of Fiscal Studies, pensions of people born in the 1960s and 1970s will be smaller than people born post-war.

But an alternative way of structuring pensions – called a Self Invested Personal Pension (SIPP) – is allowing people to invest in property in a tax-efficient manner for the future. In particular, investing in commercial property is proving popular for small business owners.

Coodes’ head of commercial property, Helen Willett, said: “The scheme works by allowing the SIPP to buy a commercial property, such as an office, shop, industrial unit, hotel or farm land.

“You can also transfer different pension pots into the SIPP, which can then borrow money to buy a commercial property.

“The mortgage, if structured properly, can then be paid off through commercial rental, and once that is cleared any income is then reinvested in the SIPP to provide tax-efficient growth-free from tax.”

The other benefits of a SIPP include no Capital Gains Tax (CGT), meaning that if the property’s value increases no CGT is payable when the pension disposes of it.

Two directors that have taken advantage of a SIPP scheme are William and Charlotte Morris, who run £8 million turnover business from Charlie Bears in Launceston.

They have invested an undisclosed sum in a commercial property close to their offices, which they are letting out, saying they wanted to wanted to make a “sensible pension choice” and to feel as though they were in charge of their own destiny.

Mrs Morris said: “It’s not for everyone and it can been a risky strategy if you don’t get the right support and advice, but what started off being quite daunting ended up being quite a simple decision.

“As we make improvements to the building, we are also adding to the value of our pension.”

Andrew Newcombe, a chartered financial planner with Bishop Fleming, said: “SIPPs can prove to be a very tax efficient way of structuring a pension and providing an income long into retirement.

“The rental income from the property will also be tax free as it is reinvested back into the SIPP.

“You can also take a mortgage of up to 50% of the net value of the pension fund to purchase a commercial property.

“SIPPS are investment are like any other, where the value and income from it could go down as well as up.

“The return at the end of the investment period is not guaranteed and you may get less than you originally invested.”

The benefits of a SIPP include:

No Capital Gains Tax (CGT) – any growth in the property value is free from CGT, so if the property increases in value then no CGT is payable when the pension disposes of it.

Allowable business expense – tax relief for business use. If your business is leasing the property from your SIPP, the rent your business pays is an allowable business expense.

Tax free rental income – if your SIPP charges £1,000 per month in rent to a business using the commercial premises, that £1,000 payment would not be subject to any tax as it is re-invested in the SIPP therefore increasing its value.

No Inheritance Tax Liability (IHT) – if you die the property invested in your SIPP should normally be fully exempt from IHT. This is in contrast to the 50% maximum for business property relief if the property is held outside a SIPP.

Ability to borrow – to help you pay for the property with your SIPP, the SIPP can take a mortgage of up to 50% of the net value of your pension fund.

So if you do already have existing funds in your SIPP this facility can be very useful in assisting with the purchase of the property.

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