My Sipp contains a commercial property valued at £250,000, which I may sell, plus £100,000 in cash. What are my options and are there any other issues I should know about concerning gearing up to buy more property?
Property purchase within a Sipp is relatively straightforward under current legislation. The Sipp must place a deposit of at least 25 per cent and may borrow the remainder to purchase commercial property. Most institutions restrict themselves to lending 70 per cent of the purchase price so the money you have available would generally equal a 30 per cent deposit.
With £100,000 cash or £350,000 in total available within your Sipp, you could envisage buying commercial property or properties with a total value of either £333,000 or £1.167m. Loans tend to be for around seven years. However, if you were looking at paying a bigger amount, it might be possible to obtain a loan over a longer period.
Commercial property brings with it a different set of risks from other investments and it is very important that advice is taken from a professional practice operating in this field.
General risks such as those applying to finding a tenant must also be considered. UK blue-chip companies or Government departments would generally be classed as very good tenants but the yield would probably be less. Short leases command a higher yield but carry more risk.
Diversification is always useful in spreading your risk so it might be appropriate to consider more than one property or a multi-tenanted facility. It is vitally important that you are fully aware of any overexposure to any one particular area that could cause the rental income to cease and the Sipp to default on the loan, resulting in a forced sale. This is doubly important if any company related to yourself becomes a tenant. Then you would not only lose your employment but you could also lose a substantial part of your pension scheme.
However, the rules on purchasing commercial property within a pension scheme will change if the Government goes ahead with its proposals for pension simplification.
We will find out in this year's Budget on March 17 whether or not the Treasury is to proceed with simplification. If you are considering buying a commercial property and simplification goes ahead, it is very important that arrangements are completed before the end of this year.
Borrowing will only be allowed up to 50 per cent of the scheme's assets. In your case, this would mean maximum borrowing after 2005 being restricted to £175,000. Therefore, you could only purchase property up to £275,000 or £525,000. This is obviously a severe disadvantage.
On the other hand, there is a distinct advantage for some in that paragraph 4.2 of the simplification proposals states that investment will be allowed “including residential property”.
Therefore, the dilemma is that if you are only happy with being involved in commercial property, you will need to act sooner rather than later if borrowing over £175,000 is required. If you are happy to restrict your borrowing to no more than half the fund, timing does not matter.
However, if residential property is now to be considered, you will have to await the new laws, when borrowing will be restricted to half the value of the fund.
Separate professional advice must be sought as to the appropriateness of residential property as an investment for a pension scheme. High yields are available, particularly in the area of student accommodation. However, students bring with them special problems, not least the state of the property when vacated.
Other schemes which look to pool Sipp investments and jointly purchase bigger developments appear very viable but the charges need to be studied, not least because commission of up to 5 per cent of the total purchase price after borrowing is being quoted.
Gearing is always dangerous and was the cause of many bankruptcies in decades past. Care is required and professional advice needs to be sought at every decision step.