Coming Soon - Property Pensions!

Did you know that you may soon have the opportunity to buy residential property with your pension fund?

Be the first to explore this opportunity - find out the facts today!

You may already have considered investing in property as an alternative to the traditional pension scheme. With the ‘invention’ of the buy-to-let mortgage many have already explored the route of investing in property to achieve long-term financial independence. But now there is another alternative retirement investment market about to open up in the UK - namely property pensions.

The concept

In 2006 new measures are due to come into force that will allow those of you with a pension scheme over which you have investment control to invest directly into residential property.

How will it work?

If you currently have a SIPP (or Self Invested Personal Pension) you are no doubt aware that you can already invest in commercial property and that you can borrow up to 75% of the property’s valuation...well, from April 2006 when the Government’s new pension simplification rules come into effect, you’ll be able to invest in residential property as well, and be able to borrow up to 50% of your pension fund’s value for the purposes of buying property. And those of you with a Small Self Administered [pension] Scheme (SSAS) will have this opportunity as well.

Tax benefits

While there is no direct taxation advantage in placing your main residence into your pension fund, you can gain significant taxation advantages if you place a buy-to-let or a holiday home that you rent out into your pension scheme for example.

These types of property investment traditionally incur both an income taxation burden on any rental income received and a capital gains tax burden on any resale profit. However, if you place such property assets into your pension scheme you will be able to achieve significant taxation benefits as the properties will be free of capital gains tax and any income tax on rental income received!

It’s possible there’s an offshore investment out there that better suits your investment needs - at least for the immediate future. If you would like to find out, let us know your requirements and we’ll put together a personalised fact pack based on your circumstances.

Any downside?

All bills relating to the maintenance and upkeep of the property must be paid out of the pension fund instead of from your own pocket, and if you have a holiday home included in the pension scheme that you sometimes use, you’ll have to pay some income tax as your personal use of the property will be deemed a ‘benefit-in-kind’.

Other features & benefits

As mentioned above you’ll be able to borrow up to 50% of your pension fund’s total value for the purposes of further property purchase - simply put, if your fund is worth £100,000, you could borrow up to £50,000 for the purchase of property.

This is actually 25% less than the amount you can currently borrow against commercial property - but you might like to consider borrowing against your earnings to inflate this amount.

How would this work?

Taking as our example a person earning £100,000 in the tax year 2006/07, they could borrow up to 100% of these earnings through equity release or by taking out a mortgage and the money raised could be put towards investment in a residential property for the pension fund - they would then get 40% tax relief on the contribution or £40,000!

Some people might like to consider purchasing a property for their children and placing this within the pension fund...the tax benefits could be quite significant and as your children will be residing in the property not you, this would not be deemed a benefit in kind nor would it be taxable.

Any other considerations?

If you were to purchase a property for your children or another beneficiary as part of your pension fund, eventually you may need to sell the property to pay yourself a pension - obviously your beneficiary should be made aware of this!

If you already own property that you’d like to consider transferring into a pension fund you’ll have to sell the property personally and repurchase it via the pension fund - this could result in a capital gains tax and stamp duty liability.

And finally, though this development in pension fund investment diversity sounds interesting and exciting, when it comes to the investment of your pension fund you should avoid committing too large a percentage of your overall pension fund to one asset class.

Furthermore the property market in the UK is already booming and some experts are warning about a readjustment in the market. If you buy at the peak of a boom you may pay over the true value for a property which would effectively reduce the tax advantages received.

As with any investment decision it is important to seek professional financial advice before making a final decision.

If you would like us to help you find an adviser to assist you, please let us know your requirements and we will put you in touch with someone in your location, specialising in your area of need as quickly as possible.

Contact us.

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