Why we put a £300k stretch of riverbank into our pension
The days of holding exotic assets within pensions may be numbered as the watchdog signals a crackdown and pension companies tighten their rules.
Many people have simple personal or workplace pensions invested in a range of mainstream funds, often selected on their behalf.
But for the more adventurous, self-invested personal pensions (Sipps) give far greater freedom over investment choices. Shops, farmland, pubs, nursing homes and even boat moorings can be held in a Sipp as long as the pension company that administers it agrees to the investment.
These arrangements allow people to harness their pension savings – which you cannot normally access until the age of 55 – to fund business interests. The assets involved are held within the Sipp just like shares, bonds or funds and pay any returns directly into the pension.
Alison and Nick Highton are using Mr Highton’s pension money, built up during his career as a pilot, to buy the moorings, workshop and car park needed by Mrs Highton’s business, Oliver’s Sailing Holidays, in the Norfolk Broads.
The couple met windsurfing and both went on to win world championships in the Eighties.
“I worked with adults with learning difficulties, but this has always been my dream,” said Mrs Highton.
“We bought two traditional Broads sailing yachts and realised we could start a luxury sailing business, which we opened last year.
“We went to a financial adviser, who mentioned the things you could do with a Sipp. I couldn’t find any pension company that would take on moorings, but eventually we found one, Dentons, that would.”
Mr Highton’s £350,000 personal pension was held with an insurer but the portfolio had not been regularly reviewed, leaving the investments out of date and underperforming. Around £300,000 of the pension is being used to purchase the properties, which are legally owned by the scheme rather than Mr Highton personally. The sailing company will then lease the moorings from the scheme and pay rent – at an independently verified commercial rate – back into the pension.
Martin Tilley, a director at Dentons, said: “From the business’s point of view it doesn’t have the money to purchase the land it needs to expand so it is beholden either to borrowing large sums of money from a bank, incurring large amounts of interest, or leasing the property from someone else.
“But with this solution you’ve got an asset that enables the business to grow and the pension receives tax-deductible rent. Instead of going to a third party, that rent becomes another pocket of wealth. All of a sudden instead of a having a pension scheme that you only look at once a year, you are engaged because you see how it is invested and how it is helping the business.”
There is enough money in the pension to buy the premises, worth around £300,000, outright. But if a mortgage were needed to fund a purchase, this could also sit within the Sipp. Up to 50pc of the pension’s value can be borrowed to go towards a commercial property. There isn’t a limit on the number of properties you can hold in a Sipp.
However, Mr Tilley warned that if the business failed, there would be a double impact as the pension’s income would dry up, too. Setting up and managing an unusual pension arrangement such as this is far more expensive with a Sipp that holds standard assets such as stocks, bonds and funds. These simple accounts can cost as little as £300 a year for a £350,000 pot.
The Hightons are paying £1,200 to set up the Sipp, transfer the pension from the old scheme and buy the premises. Ongoing management costs will be around £600 a year, said Dentons.
But this flexibility, which has existed for the 25 years since the first Sipp was launched, is under threat. In recent years there have been countless stories of failed Sipp investments, from Brazilian tree plantations to storage “pods”, that have left investors’ pensions worthless.
In some cases financial advisers were to blame for mis-selling investments, but compensation is not guaranteed. As a result, the City watchdog introduced new rules last year to force Sipp companies to hold larger capital reserves based on the mix of assets they hold.
“Non-standard” assets, including more complex commercial property arrangements, have become more expensive for firms to hold, leading to many severely restricting the type of assets they will accept. Another type of flexible pension, small self-administered schemes, or SSASs, are also in the firing line.
The Pensions Regulator said last week that it favoured blocking transfers into SSASs, which are often used for small businesses to pool resources, because many were involved in scams. These schemes can hold the same kinds of assets as Sipps, but there are added advantages.
First, there can be multiple members of the scheme, meaning business partners or family members can combine their savings. This is not possible in a Sipp.
Second, on the death of one member, remaining assets are more easily passed on to surviving members, who could be the deceased member’s children, than with a Sipp, where all accounts are separate. In both cases, inherited pensions are not subject to inheritance tax.
Lastly, it is possible to take a loan from the scheme of up to 50pc of its value. Already light regulation was made weaker in 2006 when a requirement for SSASs to have a professional trustee was scrapped.
Since then a growing number of the schemes have been used to facilitate “pension liberation” scams.
Here funds are transferred to one of the schemes because it is easier to extract cash before the minimum age of 55. If discovered by HMRC, tax charges can eat up more than half of remaining funds.
The Government estimates that there are up to 800,000 of these schemes with just a single member. Andrew Warwick-Thompson, a director of the Pensions Regulator, said SSASs had become “the vehicle of choice for criminals setting up a scam”.
But Claire Trott, a pensions specialist at Technical Connection, which provides support services to advisers, said: “These schemes have many great benefits that would be lost should they be banned.
“What those who aren’t actively involved in SSASs don’t often see is the benefits that they can bring to a small company and their owners by allowing them to fund retirement at the same time as build their business,” she said.
A campaign spearheaded by The Daily Telegraph led the Government to ban cold calls on pensions and investments to protect savers from scams. It is thought that there are 250 million scam calls every year. Between April 2015 and March 2016 pension fraud almost doubled, to nearly £19m.
Read the original story on the Telegraph website.