Doctors do it, dentists do it, even lawyers do it, so why doesn't everyone do it and put property into a pension? Sally Hamilton looks at the pros and cons of investing in commercial property via a Sipp and the sector's latest developments.
Despite a difficult market for commercial property and changes over the years to pension rules reducing its value as a pension asset, the trend for investors putting property in a Self Invested Personal Pension is remaining steady, at least by recent historical standards, according to industry observers.
There are pros and cons to the practice and not all Financial Planners recommend it and nor do all Sipp providers offer the facility.
John Moret, the industry's 'Mr Sipp', who runs his own consultancy MoretoSipps, said that of the estimated one million Sipps in place, around 50,000 hold commercial property in some form, with some premises held by more than one Sipp.
He said: "There's been a slowing down in investing in commercial property overall but compared to some other investments the arguments for investing through a Sipp still stack up."
Mr Moret blamed a lack of growth in this area partly on rule changes introduced at A-Day in 2006 when the permitted gearing allowed in a Sipp to enable savers to borrow to buy a property was reduced to 50 per cent of a pension's total asset value. Mr Moret added: "Add to that the fact that annual pension savings limits have reduced and you can see why there has been a bit of a decline. And property by its very nature tends to require larger sized chunks of investment. Having said that there is a huge market in consolidation of other pensions in Sipps, allowing people to build big enough pots."
A key concern facing providers is the looming changes to the capital adequacy rules currently being mooted by the HMRC. While the minimum capital all providers will be expected to hold will increase from £5,000 to £20,000 by 2015, regulators want those that hold 'non-standard' assets to hold greater amounts - and to the surprise and chagrin of some Sipp providers, property is being labelled 'non-standard'.
Providers will be making their voices heard on this matter over the next few months, arguing that this could damage business and reduce choice for investors. Mr Moret said: "Not only will you see some providers leave the market, meaning less choice but it could put up the cost of investing in property."
The uncertain state of the economy also has an impact, with some business owners simply not be able to salt away much in their pension at the moment, never mind find the money to buy a property. But providers and planners suggest that if they already own their premises there are clear benefits to sheltering it in a Sipp.
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Lisa Webster, senior technical consultant at provider Hornbuckle Mitchell, which holds 2,100 properties in its clients' Sipps, said the usual profile of investors is indeed the business owner who already owns his or her premises. She said: "The advantage is that once it is in the pension it is ring- fenced so if something happens to the business it is safe from creditors. And even if the business goes under, a new tenant could be found for the property."
The main drawback, however is liquidity, which can become an issue if the premises is held by several different investors, and one wants out or to draw their pension benefits. She said: "This does need to be considered. You need to organise what to do if someone dies, gets divorced and there is a pension sharing order or even if the members fall out."
Holding property in a Sipp can also be expensive compared to other Sipp investments. There are initial setting up costs, legal and surveying bills to be met as well as annual fees and other costs. At Hornbuckle, for example, a typical setting up fee is £800 with a £200 annual charge. Ms Webster said: "We will allow people to manage their own property if they want to but if they use a property management company then that's an extra layer of cost to consider. Investors also need to be aware that some Sipp providers insist they use their chosen solicitors or surveyors while others allow you to appoint your own."
Greg Kingston, head of marketing at Suffolk Life, which holds 2,700 properties between 4,500 Sipp investors, said: "The commercial property market is definitely down on say five years ago. Asset values have fallen and it is hard to find quality tenants. But in some ways the Sipp market is a little protected in so far as it is popular for those with a connected interest, such as a doctors or dentists, architects or lawyers.
"Not only is the wish for it to go up in value less important but also the tenant issue is less important. The business benefits from a secure property and the pension benefits from receiving the rent. It is an elegant situation - a win win."
The other key message many Financial Planners relay to clients is the attractive tax breaks available. Mr Kingston said: "Although Sipps can be used for retirement planning it is often tax planning that attracts people to them first with pension planning second." Rental is paid gross into the Sipp and capital gains made are also free of tax.
When there are several investors in a property, Financial Planners need to make sure clients have adequate agreements in place, say providers, which might include offering first refusal to the remaining scheme members if one chooses to leave or wants to take benefits.
Property Sipps can also play a key role in succession planning. Mr Kingston explained: "You can arrange to sell the property in this way to family members. For example,our youngest Sipp property investors are a five year old and nine year old." Although business, retail or industrial premises are the most common property type to be found in a Sipp, there are more unusual ones from zoos and schools that can be held in a Sipp so long as they are deemed eligible. However, the HMRC does not list the non-eligible types and it is up to investors and their advisors to do their due diligence on whether the property is likely to be suitable. If the HMRC decides it is not suitable, expect a hefty tax charge on the Sipp.
Mr Kingston said: "One of our most unusual cases was a gentleman who bought land and built a wind turbine on it. It is a grey area so investors need to go in with their eyes wide open. If the HMRC turns round and says it is taxable you need to be prepared for that eventuality."
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Properties can also be organised so that some of the investors purchase their share through a Sipp and others outside it. He explained: "We have a group of 100 barristers where some have their part of the property in a Sipp and others not. This is because those starting out in chambers might want to buy only a small share of the property but would find it too expensive to hold in a Sipp.
"So initially they would buy outside the Sipp. But when they can afford to invest more then the property Sipp charges make less of an impact."
Robert Graves, head of pensions technical services at Sipp specialist Rowanmoor, agrees that the costs means property Sipps are most suited to the better off. He said: "Clearly you need reasonably-sized funds and it's only suitable for high net worth individuals."
He said Rowanmoor's customers tend to like the fact that the rent on property goes in to their pension tax free. Mr Graves said: "Another attraction is if the business needs to borrow from the pension scheme, the repayments also go back to the pension scheme."
Mr Graves warned: "There are risks in having a ot of your pension fund in one asset class. Since it is relatively illiquid you have to think about what will happen when you retire. The good thing is if you have tenants in the property they will be paying rent, which you could take out as drawdown."
He points out the need to be prepared for a director leaving or joining, which can add extra administrative costs because each individual must have a separate Sipp.
Mr Graves said this is why some limited companies prefer Small Self Administered Schemes (SSAS) instead of Sipps because the property becomes part of one fund rather than made up of separate Sipps.
He added: "SSAS schemes don't lend themselves to partnerships although we have developed a hybrid of the two types of scheme that can suit this category."
Financial Planners have diverse views on the attraction or otherwise of property Sipps. Ian Brookes CFP^CM of Critchleys Financial Planners in Oxford, is a supporter of Sipps and his firm arranges a number of plans each year.
He said: "Clients often do not realise the potential benefits. The cases we have are usually driven by us when we see it suits the client's circumstances. When we explain how it works they tend to like the idea. If it is a single Sipp and straightfoward, we tend to use AJ Bell's SippCentre Sipp but if it is for multi-ownership or where a property is only part-owned by the Sipp we'll use AJ Bell's Platinum Sipp.
"For example, we have one client whose Sipp owns 14 per cent of a large property so we had to move it up to Platinum. The legal costs go up and it is more expensive."
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Mr Brookes added that clients like the fact the rental income gets paid into the Sipp, which is paid gross. He said: "This allows clients to build up cash and they can invest that money that's coming in. Then there is the growth in the value of the property, which is also not subject to capital gains tax."
He favours Sipps for clients when they have a connection to the property, such as through their own business. He explaineds: "It is usually better when you have experience of the property and knowledge of its potential and to be able to judge it on commercial terms."
James Norton CFP^CM of Evolve Financial Planning is not keen on property Sipps of any type, fearing that business owners who put their premises in their Sipp are putting "too many eggs in one property."
He said: "I can understand why entrepreneurs who own their own premises think it makes sense but what if the business gets into difficulties and you stop paying rent? And what if your property is not in a prime position that someone else wants to rent? You may end up with a rental void for years. I'm saying this because I have a client this happened to. Not only did the value of his property fall from £1 million to £650,000 but the rent fell from £80,000 a year to nothing. Fortunately, he is very wealthy and he didn't need the income from it. If you invest in a property fund that is invested in thousands of properties then that's less of an issue."
Carl Melvin CFP^CM of Affluent Financial Planning in Glasgow, believes there is a persuasive case for property, so long as Financial Planners and their clients full understand all of the risks and the pitfalls they may face. He said: "The risks include the fact that it's illiquid and that it may be harder to get a balanced portfolio. But the real lollypop is that the pension becomes the landlord and the rent goes into the pension."
He is more wary of third-party tenants, however. He added: "If you rent to a third party and they go bust then there's no rent coming in but the Sipp must still deal with all the costs. It's important not to have just the property in the Sipp so you can cover these costs. In extreme cases the property could be repossessed."
Mr Melvin underlined the appeal of the tax benefits and likes the security it can offer. He said: "There will be no capital gains tax when the property is sold which there would be outside a Sipp. In my experience it is more suitable for the larger property purchases and for clients with a reasonable time from retirement.
"I think it is best suited to those from age 30-55. The other appeal is the security of tenure. If you own the business you won't be thrown out of your property by the landlord."
While he sees the attraction of holding standard commercial property in a Sipp, he is not keen on more 'exotic' property types. He said: "Cape Verde properties? I wouldn't touch them with a bargepole."

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