Sipp shapes up

My husband and I have bought the property where we work by using our Sipps. We are now accumulating significant amounts of cash and are wondering what to do with it.

Your joint ownership of a property has proved a success, the only downside being the inflexible fixed-rate mortgage you used does not allow early repayment without penalty.

You must never forget the risk of owning property within your Sipp. Should you lose your business, not only is your livelihood at risk but you could lose the tenant of the property. There is borrowing within the Sipp and if there is no money to service the loan, then the bank could foreclose, meaning you lose your business, your livelihood and your pensions.

Thankfully, your circumstances are rosy, with a successful business and maximum pension contributions being made. Options for the extra funds include all the investments usually associated with pension funds, from cash deposits to what some regard as lower and higher-risk investments, through to individual equities.

You have many years until retirement and your son is now involved in the business, with the view to him taking over one day. You feel your business will always be successful and will continue to be tenant of the pension scheme property, with its secured rent eventually paid to you as pension.

The independently valued yield on the property is just under 10 per cent a year. Everyone is happy with that. What you may want to consider is a further commercial property investment but this time looking at a more conventional property with a blue-chip tenant.

What you will find with this change of tenant is that the term of the lease will be much longer and the cost for this blue-chip longer-term lease will be a fall in yield.

If your prime motivation is to generate a good return, the balance of the two may be attractive. Even with the existing borrowings, you are able to borrow 50 per cent of the net assets of your two pensions.

We have to find a lender that will provide the finance but this is acceptable in pension law. The lender will generally be happier with the blue-chip tenant, identifying that the risk is lower.

Taking age into account and the need to accumulate extra funds to secure potential tax-free cash, I would suggest a loan of no more than 10 years. The sums involved can then be undertaken in reverse, identifying an ideal amount of borrowing that, when added to the cash in the fund, provides a purchase price.

I started by warning against the risks associated with your livelihood, business and pension being involved in the one property. By moving down this new route, while you are reducing some risks, you must not forget that, from an investment point of view, all your eggs will be in one investment area – commercial property.

Richard Jacobs is managing director of Richard Jacobs Pension and Trustee Services