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The Advantages of Investment Property SIPPs

The self-invested personal pension (SIPP) is an excellent pension opportunity for investors who are confident in their decision-making abilities. The main appeal of the SIPP is that it gives the investor maximum control over how his or her money is utilised. SIPP investors can direct their money to a long list of investment opportunities, including:

  • individual stocks and shares
  • unit and investment trusts
  • government securities
  • insurance company funds
  • endowment policies
  • deposit accounts and national savings in investment opportunities
  • commercial and residential property.

In this guide, we will focus on the last product on the list: commercial and residential property. There are quite a few advantages of investment property SIPPs that are well worth considering if you are looking to establish a new SIPP account. You might also consider property if you have already invested in a SIPP but have not yet looked at this asset.

Basic SIPP Concepts

Before we can talk about the advantages of investment property SIPPs, we must first discuss the basics of how SIPPs work. As a self-investment vehicle, the investor establishes his or her pension account through a third-party provider such as an insurance company or specialist pension operator. There are two primary types of SIPPs the investor can choose from:

  • Execution-Only – This type of SIPP is an account in which the pension administrator has only one function: to execute transactions on behalf of the investor. The administrator makes no decisions and offers no advice. Members are entirely responsible for the success or failure of execution-only SIPPs.
  • Full Service – A full-service SIPP utilises the pension administrator for more than just executing transactions. The administrator may offer advice and recommend certain investments for an extra fee. Members ultimately make all final decisions, but administrators contribute to the process.

You should also know that every SIPP operator does not necessarily offer property options. Some do while others do not. Investors would have to do some research to find a list of potential SIPP operators offering the kinds of property investments they are looking for.

Commercial or Residential Property

In 2006, the law was changed to finally allow SIPP investors to hold commercial property in their portfolios. Many have taken advantage of that freedom since then. With pension reform introduced in 2014, it is also possible to hold residential property as an investment. Few SIPP investors do so because of the tax implications. Simply put, purchasing a buy-to-let property as an individual investment opens the investor to capital gains tax as well as other liabilities. The only way to get around them would be to invest in a residential property fund.

This leads us to our next point. SIPPs invest in commercial properties in one of three ways:

  • Individual Purchases – The most common way to include commercial property in a SIPP is to simply use the money in your fund to buy individual properties by yourself. You become a landlord upon doing so.
  • Company Purchases – It is possible to establish a limited liability company for the purpose of obtaining multiple commercial properties. You can then use your SIPP to invest in property through your new company. There are certain advantages and disadvantages to this setup that must be considered.
  • Property Funds – Some investors have no interest in being landlords of either commercial or residential property. Therefore, they invest in property funds instead. Property funds pool money from multiple investments in order to purchase commercial or residential properties. The funds are managed by licenced professionals who handle all of the administrative aspects of property ownership and management.

Anyone considering investment in property SIPPs needs to take the time to educate him/herself about all the implications. Property is extremely attractive as an investment – especially commercial property – but it must be approached with an understanding of all of the legal and tax implications. If there is any kind of investment that requires getting sound advice from an attorney and financial planner, property investing is it.

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Advantages of Investing in Property

Now we finally get to talking about the actual advantages of investing in property. They are numerous, to say the least. If you are willing to take the risk and assume some of the responsibility of property investing, you could earn more through this one investment class than anything else you put your money into.

The advantages of investment property SIPPs are as follows:

  • Increased Income – The investor who purchases commercial properties either individually or through a limited liability company has the added benefit of receiving monthly rental payments that boost retirement income. Furthermore, that income is subject only to standard income tax because it is funnelled through the SIPP account. It is not subject to capital gains.
  • Property Sale – Investing in commercial property always carries with it the opportunity to sell properties at a later date. Putting money into investment property SIPPs today could reap tremendous rewards as property values climb over the next 10 to 20 years. And once again, any proceeds from future sales are not subject to capital gains because they are held by your SIPP.
  • Bankruptcy Protection – An investor who puts money directly into commercial or residential property outside of a SIPP is purchasing an asset that could be held in a bankruptcy proceeding. The same is not true when investing through a SIPP. Should the SIPP investor declare bankruptcy, property held in his or her account is not classed as an asset that can be used to settle debts.
  • Cost of Purchasing – Any property investment made outside of a fund has certain legal and transaction expenses attached to it. All of those expenses are paid by the SIPP rather than the individual investor. For all practical purposes, that means you can invest in property with less money up front. The only exception would be setting up a limited company as it would require a certain amount of money separate from that contributed to your pension.
  • Investment Stability – We listed above numerous investment options you can choose from when working with a SIPP account. Most of those other options have one thing in common: market volatility. For example, stocks and shares can be influenced overnight just by a little bit of political unrest or market manipulation in a foreign country. Property investing is not subject to such volatility. For decades, it has remained one of the most consistent and stable asset classes around.

It is clear to see that investing in property is something to at least consider for your SIPP. If you are not yet invested in property, you should at least investigate the opportunities to see what they hold. Also, be sure to do a lot of research into all the nuances of property investment. Unless you invest through a property fund, you will essentially be a landlord with all of the rights and responsibilities that come with it.

It could be that you are interested in investment property SIPPs but your current operator does not deal in property. That is not uncommon. It is also not a problem. You can either establish a second SIPP account with a new operator or transfer your current pot into an entirely different SIPP. As long as your new pension scheme qualifies under government rules, the transfer should be seamless and cost-effective.

Is property investing the right option for your SIPP? Only you and your financial advisor can know for sure. We urge you to sit down and have a conversation to talk about the options. If your current financial advisor has no experience in property, be sure to get a second opinion from someone else. There are plenty of independent advisers with the knowledge and experience to advise you correctly.

Investment property SIPPs are very popular among certain kinds of pension investors who know how to make them work. They might be right for you, depending on your level of experience and risk tolerance. Properly invested, property can offer a tremendous return that will more than provide for your retirement.


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