Self-Invested Personal Pension (SIPP): The pension option you shouldn’t hate and need to consider

Many business owners that we meet have a genuine dislike of pensions. Why? Mostly because they believe they’ll be tying up their wealth in a pot without much return.

But your personal view on pensions may be distorted by how you feel they work, and how little control you think you’re going to have in how your money is invested.  Because a pension is really just a wrapper for investments – and a very tax-efficient one at that. But that wrapper comes with rules.

Cue the pension that breaks many of these rules you dislike so much:  The ‘Self Invested Pension’ or SIPP for short. Sometimes referred to as a ‘DIY Pension’, the SIPP allows the individual to have control of how their pension pot is invested.

A SIPP can invest in:

  • Commercial property
  • Stocks and shares
  • Investment trusts listed on any stock exchange

And plenty more…

Find out the rest of your investment options, and why we think you should choose a SIPP over a conventional pension, in our video below.

Still dislike the idea of a pension? If we’ve changed your mind and you’d like to chat about investing in a pension, purchasing a commercial property, or anything else we discussed in the video – pop your details in the box below. 

Self-Invested Personal Pensions

Many business owners that we meet have a genuine dislike of pensions. Not for them tying up their wealth into a pot with what they perceive as a poor return.

But their personal view on pensions may be distorted by the way that they feel pensions work and the way that they are invested. Because a pension is really just a wrapper for investments and a very tax-efficient one at that. But that wrapper comes with rules.

A pension that breaks many of those rules is a ‘Self Invested Pension Plan’ or SIPP for short which is sometimes referred to as a ‘DIY Pension’.

Why have a SIPP instead of a conventional pension?

SIPPs allow the individual whose pension it is, choice about how their pension pot is invested. Whilst the services of a Pension Trustee are required to ensure that investments comply with the relevant rules you can choose what investments you want to put your savings into and can usually manage such investments online. 

What can a SIPP invest in?

It’s probably easier to say what it can’t invest in and the big one is residential property. Even a shop with a flat over the top is not allowed. Assets with any kind of personal benefit to them are prohibited but most other investments are acceptable including:

  • Commercial property
  • Stocks and shares
  • Investment trusts listed on any stock exchange
  • UK government bonds, plus bonds issued by foreign governments
  • Open ended investment companies which are recognised by the Financial Conduct Authority
  • Gilts and bonds
  • Exchange traded funds traded on the London Stock Exchange or other European markets
  • Bank deposit accounts including non-Sterling accounts
  • Real estate investment trusts listed on any stock exchange
  • Offshore funds

Using a SIPP to buy property for your business 

If your business wishes to buy property to trade from, it would usually put down a deposit and take out a mortgage for the rest of the purchase price. When you pay your mortgage, only the interest on the mortgage is allowed against your taxable profits.

However, if your SIPP were to purchase the property then it would be given tax relief at the time when you start to pay into it – so any funds in the SIPP can then be used to purchase a property, without tax taken out of them. This saves you the tax which you would have paid out of your income, giving you more cash to spend elsewhere!

If there are not sufficient funds to buy the property outright, a SIPP may be able to borrow extra funds. Banks will lend up to a certain percentage of the value of the property (although a SIPP will not be able to obtain a mortgage for more than 50% of the existing pension fund value.)

By purchasing a property for your business through a SIPP, your business could then put the rental payments back into your SIPP (with no tax payable) alongside any additional pension contributions that you might like to make yourself, therefore re-growing the value of your SIPP for the future.

In addition, if you sell the property, any profit remains in the SIPP tax-free – allowing your pension pot investment to keep growing towards your retirement.

Ways to make tax free profits on non-commercial property

In addition to using a SIPP for owning commercial property, there are several other ways you can save tax on your individual property investment.

  • Transferring ownership or joint ownership with spouse
    If you are lucky enough for your property to be making significant rental profits (because there is either little or no mortgage interest you can claim as tax relief), you may be able to transfer most of the rental income or rental profits into the name of the non-working spouse thus paying very little (if any) tax at all on the rental income produced.
  • Investment property
    If property is let for the entire time then any gain made on the sale of that property will be subject to Capital Gains Tax. However, should the gain be less than £11,850 (2018/19) then this will be covered by the individual’s annual exemption and thus no tax will be payable on the gain made. Likewise, if the property is owned jointly by two people then both individuals will be able to use their exemptions.
  • Building your own property
    It is also possible to obtain VAT relief on any materials required to build your own home as a special allowance is made to ‘Do It Yourself Builders’. New residential property is zero-rated for VAT and so you can claim back VAT on any materials effectively making the building of any property VAT-free.
  • Main Residence Relief
    If a property is originally purchased by an individual as their main home then provided that individual sells the property within three years of moving out of the property, no tax will be payable on any gain made upon sale.

However, if the individual was to let the property out for several years after his departure and this period exceeded three years, for example, the individual may be able to claim what is known as ‘Lettings Relief’ on any subsequent gain from sale of that property. Lettings Relief is a maximum of £40,000 and would apply to the proportion of the gain which is made during a period that the property was let to tenants. 

So, if you are looking to either invest in a pension, considering purchasing a commercial property, or thinking of investing into a residential property company, a SIPP is a must. Get in contact with our sister company, A4G Wealth, using the form below. They are a group of independent financial advisers who will take the time to sit down with you and discuss your options on making the most tax efficient pension contributions.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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