View more on these topics

The dirty dozen

Norwest Consultants principal Harry Katz suggest 12 reasons to be cautious of the hype over putting property in a Sipp

As everyone waxes lyrical on how huge the market is going to be for property purchase within self-invested personal pensions from next April, all I can do is bury my head in my hands.

Let us look at a dozen basic facts about this market.

1 Nobody has mentioned the difference between owning residential or commercial property. With residential property, the owner is generally responsible for maintenance and insurance. A commercial property usually has a fully repairing and insuring lease with periodic upward-only reviews.

A quick survey of the residential market will show you that current yields bear no resemblance to capital values. The formula is quite simple. Will the rental income be more or less than a mortgage on a property of the same value? In the current market, the answer is invariably that it will be less. This indicates that properties are overvalued.

2What of capital appreciation? Unlike many of the ostriches, I really do not see any real upside in the foreseeable future. I am not unique in this view.

3Bear in mind that income drawdown is limited to 120 per cent of Government Actuary’s Department limit, which is about 7.2 per cent in current terms.

4This figure has to take into consideration that the Sipp provider will charge somewhere between 700 to 900 a year for running the drawdown plan, plus costs such as VAT. There will be valuations every three years, which in the case of commercial property could cost at least 1,000. That is before we start wondering whether the adviser is going to act as a charitable institution or also charge a fee. This raises the hurdle rate against a comparable annuity.

5Is there a guaranteed tenant? What happens if there is a period when the property lies empty? The idea of drawdown or an alter- natively secured pension is to provide an income. If this is not forthcoming, the costs will not disappear.

6Do the clients realise they do not actually own the property? That they will have a lifetime of bureaucracy and petty rules ahead of them? That they will have the pension provider on their back, telling them what they must or must not do with the property? Each new tenant will require a new lease. The lawyers are licking their lips.

7Even before we get this far, there are problems. If you already own the property, you cannot just bung it in your pension and get tax relief. The property value will be grossed up and, if this figure does not equate to your annual income, you cannot use it as a contribution. How many properties are worth 100,000 (128,205 gross)? How many clients have this sort of annual pensionable income?

8Even if you could stuff a property you already own in your pension, are you going to attract trouble? Where did the money come from to buy it? Have you been renting it out since purchase? If so, did you declare the income? For some, this will be an open invitation for a Revenue investigation.

9Is it a holiday home? If you do not rent it out, you will be assessed on the rental as a benefit in kind, so it will cost you money. Be very sure that the Sipp administrator will shop you to the Revenue.

10What about buying a property with a mortgage? The idea of a pension is to provide security when normal remuneration ceases. Is a mortgaged pension such a good idea?

11Then we come to the idea of protect-ing the fund from inheritance tax. The Revenue has just admitted that IHT will be charged if the fund is passed on. A 40 per cent IHT charge is better than losing the lot but research indicates that the current generation would rather spend the money themselves than worry about bequests.

12So why all the fuss? Life office marketing departments are making much of Sipps as they realise that their traditional wares are under threat and they have to find alternative sources of income. Who wants to be first in the queue for a Sipp misselling review in five years time?

I am not saying that buy- ing property within a Sipp is necessarily a bad idea but I do not think the downsides have been properly appreciated. Yes, it is true that with a decent commercial property you can benefit greatly from a rising income stream as upward-only reviews are not uncommon on a fully repairing and insuring lease.

The GAD limits get reviewed triennially when a survey is done, and hope- fully, the value of the property moves up. Just hope the rental yield is equal to or greater than the GAD limit.

But I hope this article has served to illustrate that it will not all be roses.


First launches its cheapest ever mortgage

First Direct has launched its cheapest ever mortgage with a discounted variable rate of 2.99 per cent until May 2006.At the end of the discount term borrowers will revert to First Directs standard variable rate of 5.5 per cent.First Direct chef executive Richard Kimber says: “This mortgage is a win-win for homeowners. First, the lowest […]

Multi-manager View: Full to capacity

One of the frustrations in fund management is when a promising fund manager loses momentum and the success with a small fund gives way to mediocrity after strong asset growth. Sometimes this is ascribed to cashflow issues but sometimes the problem is more permanent, the process has simply run out of capacity.

Child trust funds boosting savings

Child trust funds are changing saving behaviour, with more parents saving more money towards their children’s future, says The Children’s Mutual. The company says it has seen an increase of 50 per cent in the number of new parents saving for children than before CTFs were introduced. Before the launch of CTFs, research from The […]

Standard in Sipp deal with Punter

Punter Southall Financial Management has signed up Standard Life as its exclusive Sipp provider and will adopt a customised version of the Standard’s Sigma platform. The deal ties Punter Southall FM, the advisory arm of actuaries Punter Southall & Co, to Standard’s Sipp for the next five years. As part of the arrangement, Standard has […]

Image courtesy of Stuart Miles at

Pension freedom: wish you were here?

Out there lies a warm ocean of desert islands, sun, sand and palm trees, where individuals can choose how and when to tax-efficiently access their pension fund and realise the retirement dreams they have worked so hard for.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm