Self-Invested Personal Pension (SIPPs)

Changes to the state pension scheme in recent years, together with a growing number of self-employed individuals, has seen a huge rise in the popularity of personal pension schemes.

There are three basic types of pension schemes it’s possible to sign up to. These are an Ordinary Personal Pension, Stakeholder Pension (which is capped at 1.5%) and a Self-invested Personal Pension (SIPP). It’s the SIPP we’re looking at more closely in this article.

How a SIPP works

A SIPP is similar to an ordinary personal pension in that you’ll pay contributions and receive tax relief. Where it differs is in terms of flexibility, when it comes to where your money will be invested. With an ordinary pension scheme, the company administering the pension will invest it in a range of different funds. With a SIPP, the individual chooses where their money will go. This could be in the form of stocks and shares (both UK and abroad), unit trusts, investment trusts or property & land (although not every SIPP offers the ability to invest in property).

How to invest in property via a SIPP

Property in a SIPP is viewed as a specialist investment, and because of this, would be subject to higher charges. It’s also possible to borrow money via a SIPP in the form of a mortgage. This can be used to finance a property, which could then be rented out and the rental income paid directly into the SIPP (and which could be used for running costs tied up with the property, e.g. marketing for new tenants, management charges etc).

The way to do this though, is not via residential, but rather commercial property. With the former, the tax rate can be as much as 55% and then there would be further tax to pay on profit. You could invest in a property fund, but then you won’t have any say over future investments and you’ll have to pay a charge for access to the fund.

Investing in commercial property, on the other hand, wouldn’t result in any of the above. That is, provided you buy the property at a market value rent and charge only a market value rental. Not only that, but you wouldn’t have to pay tax on rental profit (because it’s a pension) and there wouldn’t be any Capital Gains Tax to pay should you later decide to sell your share in this commercial property.

What this means then, is that it’s possible to own a large part of a commercial property (there would need to be money put aside in the SIPP to pay for ongoing costs such as any void periods and for general maintenance) with your SIPP. That would result in passive income for as long as you’d like.

But it’s not only offices, warehouses and business premises that qualify for this form of SIPP investment, it’s also possible to put your SIPP into car parks and hotel rooms (usually for a fixed period of three or five years – showing just how flexible a SIPP can really be).