Okay, well not everyone may get as excited about pensions and investments as I do, but the flexible rules that govern pension funds do allow for a wide range of investment options.
Self-invested pensions, known as SIPPS, allow the pension fund to buy assets such as commercial property. This can include farmland, shops or offices. In the case of farmland that is zoned for building, or has sites passed on it while it is being held within a SIPP, there will be no capital gains tax to pay when the land is sold. This is because any profits made within a pension fund are exempt from capital gains tax.
The rental income from land or buildings held within a SIPP is exempt from income tax.
It is also worth noting that the assets when held within a pension fund are exempt from inheritance tax on death (although a specialist trust should be used to ensure this). This contrasts starkly with directly holding investment property, which in most cases is subject to capital gains tax at 18 per cent or 28 per cent and subject to income tax on rent at the investor’s highest marginal rate.
A SIPP can also make loans to unconnected businesses which are in need of cash in order to grow and the interest that the SIPP can charge on these loans can sometimes be in double figures.
Small self administered schemes known as SSASs are similar to SIPPs but tend to be held by company directors. A SASS has the added option that it can lend money back to the directors’ own company to aide growth or cash-flow problems.
We have seen many examples of investors using their pension scheme to buy an asset off themselves, thereby releasing cash from the pension fund back into the investors hands.
Most SIPP rules allow part purchase of a commercial property if there isn’t sufficient cash within the pension pot to buy the complete property.
A big word of warning is that using your pension fund to buy a single large asset concentrates investment risk and also can cause liquidity problems.
The regulator is very concerned about the more esoteric overseas properties that some investors have been encouraged to put inside their pensions, so please take advice before investing.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org