We have been included in VouchedFor’s 2023 Top Rated Financial Adviser Guide, distributed in The Times.
We have been included in VouchedFor’s 2023 Top Rated Financial Adviser Guide, distributed in The Times.
We have five local offices and can help if you are looking for a:
Financial Adviser in Edinburgh
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If you would like to speak to an Independent Financial Adviser (IFA) then book your free initial consultation.
This article will give a brief overview of SIPPs. For a more in-depth overview, click here to download our ‘Guide to Self-Invested Personal Pensions’.
Firstly, it is important to note that Self-Invested Personal Pension Plans (SIPPs) are essentially Personal Pension Plans (PPPs) but with additional investment options that may be attractive to investors seeking more adventurous investment opportunities.
The primary distinction is that with a SIPP, individuals can effectively act as their own fund managers and have the ability to invest beyond the typical insured contracts within a pension wrapper, which includes shares and property.
Nonetheless, it is vital to keep in mind that SIPP trustees may still enforce limitations on the investment options they offer. Additionally, if a more unconventional investment is sought, only specialised SIPP providers may be willing to facilitate such transactions. Charges on SIPPs are generally higher than those for a PPP.
Since April 2006, any investment that is deemed to be a commercial investment will be allowed. This means that SIPPs are allowed to invest in most assets including the following:
Initially, the Government was going to allow personal pension funds to invest in residential property and this created considerable interest from investors. However, in December 2005, the Chancellor announced a U-turn by announcing that additional tax would be charged if a pension fund invested in residential property.
If a SIPP does invest in residential property or “taxable investment/property” such as vintage cars an extra charge will be applied. Onerous tax charges on the prohibited investment can be levied.
This means that although it will be possible to invest in residential property the additional tax charge makes it an unattractive option.
Taxable property consists of the following –
What charges would be levied for holding residential or tangible moveable property?
For these reasons, providers will not permit such investments.
The current rules for property investment within a SIPP are:-
Key points
Although the list of available SIPP investments is broad, pension providers do have discretion over what types of property they will accept into their SIPP so this should be checked with the individual provider.
It is important to remember that commercial property is an investment like any other and it can rise or fall in value – ultimately affecting the benefit payable at retirement. If a property is bought when the market is high, then if there is a future slump in property prices, your pension fund could potentially be in negative equity.
Finally, it takes time to sell a property and so contingency plans such as investing in other assets should be considered to cover the event of death, divorce or retirement of the member.
Whilst there are drawbacks as noted above, there are also a number of attractions of putting property into a pension scheme:
If there are insufficient funds to buy a property outright, a commercial mortgage may be taken out by the trustees of the SIPP. In addition a SIPP can borrow 50% of the net scheme assets i.e. total assets less any existing borrowing.
Example:
Helen has a pension fund of £200,000 and she wishes to purchase a property for £150,000. She wishes to retain £125,000 invested in shares so uses £75,000 from her pension and borrows £75,000 via a commercial mortgage. The total gross asset value of Helen’s pension is £275,000 when the mortgage is added.
Should she wish to borrow more money to purchase another property, the borrowing requirements will be based on her net asset value as illustrated below:
Gross asset value: £275,000
Net asset value (less mortgage): £200,000
Borrowing limit 50%: £100,000
Existing borrowing: £75,000
Potential borrowing: £25,000
(borrowing limit less existing borrowing)
The SIPP provider will levy charges to cover the costs of setting up and running the SIPP. How these charges are structured normally depends on what type of SIPP you are looking to set up.
The two main types of SIPP are as follows:-
Hybrid SIPP – this is a SIPP set up with a product provider such as Standard Life or Aegon. It is quite common for these providers to require a portion of the pension monies to be invested in their own pension funds (known as insured funds) and you are then free to invest in your own choice of assets with the remaining monies. In return for keeping a minimum amount of pension money invested with the product provider, the SIPP is commonly then subject to a reduced level of charges.
The charging structure of these types of plan could include an annual management charge for each fund, an initial charge for purchasing the fund (known as the bid/offer spread) and possibly a set monthly or annual policy fee.
Pure SIPP – this is a SIPP offered by a specialist company who impose no restrictions on where the monies can be invested.
The charging structure of these plans is often a fixed monetary amount not related to the size of the pension fund, so there is economy of scale. Some levy an all-inclusive charge while others charge on an itemised basis, so clients may pay for services they do not use, or get a better deal on an inclusive rate if they actively change investments.
Whether you chose a hybrid or pure SIPP, there may also be additional fees for the use of a stockbroker, from the plan’s bank account and from the use of an investment manager. Charges/fees may or may not be subject to VAT at the prevailing rate.
Many individuals use a SIPP to invest in property. It is important to note that when purchasing property, there are a number of acquisition costs for an individual to consider. Many of them could be quite substantial and therefore, it is important for the individual to work out a budget at the outset. There will also be solicitors and surveyor’s fees plus legal disbursements. Certain pension providers will insist on the individual using one of their own solicitors and surveyors and others will allow individuals to use the solicitor/surveyor of their choice. Legal disbursements will include Land Registry fees, search fees and importantly will include stamp duty land tax. Other costs will include finance fees such as bank arrangement fees and valuation fees. The plan holder may have a choice of going to a lender of his preference depending on the practice of the SIPP provider.
There will also be ongoing property management charges for services such as checking and reviewing insurance requirements, inspecting property, reviewing rents etc. Because the pension scheme and not the individual will own the property, all property related bills would have to be paid from the pension fund e.g. council tax and buildings insurance.
A SIPP is a type of personal pension plan that offers more flexibility and choice than traditional pension plans but this usually comes at a higher cost. Although you can approach a SIPP provider directly and they will steer you through the process, we would always recommend you seek advice from a financial adviser.
A financial adviser can help you choose the best provider for your needs and work with you to create an investment strategy and portfolio.
This information is based on our current understanding and is subject to change without notice. This article is for general information only and does not constitute advice. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.
The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
We have local offices in Edinburgh, Falkirk, Glasgow, Livingston and Stirling and provide Financial Advice throughout Scotland. If you would like to speak to an Independent Financial Adviser (IFA) then book your free initial consultation.
Chartered Financial Planner at Select Wealth Managers with 14 years of Financial Services experience. Before working in Financial Services, Sean…
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