Building up to big changes
MAJOR REVISIONS to the pension investment rules will take place next April, when the new simplified pension tax rules begin, resulting in massive change in the world of pensions.
One of the most significant changes, at least to judge by the amount of press coverage it has received, is the removal of restrictions on residential property investment. The reform will mean that from April 6, 2006 you could invest in buy-to-let property through your Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS).
Some pension experts – including one of the UK’s largest life assurers – expect a surge of investors to put their pension funds into bricks and mortar. There have even been calls for the chancellor to reverse the new tax law, or face a four billion pound bill for tax relief (Financial Times, June 2005). So far, the Treasury has stood firm on its view that there will not be a wholesale rush of pension cash into residential property.
There are good reasons to think that the Treasury may be right on this score. For example, the issues you would face as a pension residential property investor include:
Investment strategy – if you own your home, you probably already have a substantial exposure to the residential property market. A buy-to-let investment through your pension would increase that exposure at just the time when most of the housing market is virtually stagnant. The Nationwide Building Society recently reported that annual house price inflation was at its lowest level for over nine years and said it expected “the path of house prices to continue to soften gently for some time”.
Buying power – the average value of a UK investment property in June 2005 was over £155,000, according to Paragon, a lender in the buy-to-let market. From April 2006, no more than half of a pension plan’s net value may be borrowed for investment purposes. So, you would need a pension fund of about £105,000 as a starting point to acquire just one average buy-to-let property, after purchase expenses are taken into account; and, of course, a single property hardly counts as a diversified investment portfolio.
Costs and control – many owners of buy-to-let property undertake their administration and letting themselves. Agents’ fees of 10 –15 per cent (plus VAT) are an obvious incentive to do so. But this might not be possible for property held in pension schemes. The pension trustees/administrators will be the legal owners of the property – not you. Health and safety regulations, and other obligations faced by property owners, will almost certainly mean that the trustees/administrators will want professional agents to handle every aspect of the letting. For the same reason, pension providers are likely to be wary of student lets and properties where the rent is paid by the Department of Works & Pensions.
Investment in overseas
property
The possibility of investing in overseas property has created a great amount of speculation. However, the technicalities of achieving this are still far from clear.
Each individual country in Europe treats property ownership differently and most, of course, do not have pension legislation similar to that of the UK.
However, one point does seem clear – while a UK pension fund is exempt from taxes in the UK, foreign property purchase most probably will not be exempt from local taxes. This could trap many unwary investors by transferring their UK tax free pension funds into a taxed investment environment, thus possibly negating any advantage of making the investment in the first place. This picture is still developing; however, we believe this to be a real threat to those with ambitions of overseas purchase.
For many people, a ‘normal’ pension plan, with a broad spread of professionally managed investments, looks a more sensible choice than the buy-to-let pension. Nevertheless, there will be a few wealthy individuals for whom putting residential property into a pension makes sound financial sense. If you are interested in learning more about this new investment opportunity, your investigations should start now. Property purchase has never been the quickest of transactions and when you add in another party – the pension provider – the process can only slow down further.
