Using your pension to invest in commercial property
You may already understand how pensions work, including the benefits you may receive once you retire, but did you know that itās possible to buy commercial property in the UK using your pension pot?
In the same way that your pension can be invested in stocks and shares, it can also be invested in the bricks and mortar of commercial property. The types of buildings that qualify are warehouses, retail units, offices etc. You canāt invest your pension into residential property.
This form of investment can prove to be highly tax-efficient, particularly for business owners.
Benefits to you and your business
Investing in commercial property can be beneficial if youāre a business owner, as youāll end up with suitable premises for your company, as well as regular rental payments into your pension. Plus, itās highly tax-efficient.
As both the business owner and pension holder, you know the pension trustees and you know how much they want for rent. Your pension is growing by the rental amount each month, and you know that at retirement you can sell the property. Plus, because itās your business thatās occupying the property, you donāt have to worry about what any tenants are doing in there.
Example ā Youāre the owner of a business thatās outgrown its current premises. Youāve spotted the perfect warehouse for sale at Ā£0.5m, and you have a pension pot of the same value. Once your pension trustee has confirmed the building is a sensible investment, the surveys and paperwork can commence and your pension funds can be used to buy that warehouse. Once itās all completed, the building will be owned by your pension.
Your business will take up a commercial lease with the pension, with rental fees based on standard market rates and negotiated with your pension trustee. Each time you make a rental payment, the money is paid straight into your pension, not a landlord. So, not only have you secured new premises for your business, your pension now has a tangible investment too.
If your pension pot wonāt cover the purchase priceā¦
This doesnāt necessarily mean you canāt invest. You have two choices:
- Add extra money into your pension before purchase
This is where the pension system can really be utilised to its fullest.
If youāre a 40% tax payer and need another Ā£10,000 in order to buy the property, then youād only have to add Ā£6,000 to your pension, because the government tops up your payment with tax relief.
- Take out a mortgage to cover the extra cost
If youāve got Ā£500,000 in your pension and the property that fits the need of your company is Ā£600,000, then you could look into arranging a mortgage for Ā£100,000. It is important however to note that pension rules cap the total mortgage at 50% of pension assets.
- Buy the property with business partners/family members
You can add together the pension pots of others and buy the property in proportion to the amount of capital contributed upfront. This is possible with the use of a group SIPP or SSAS. It should be noted that this will add to the cost of set up and administration, the initial which can run into a few thousand pounds.
If your pension funds are spread across multiple schemesā¦
You can still invest, but it may be advisable to consolidate them first.
If you purchase a commercial property with two pensions, then the building would have two owners. This means youād double your costs for services such as conveyancing, and youād also need two rental agreements ā it makes sense to put everything together into one pot and then buy your property.
āYou can go into business with a partner and use your two pensions to buy half of the property each, but it does add to the cost.ā
If you want to move out or sell upā¦
Youāll have to honour any terms and conditions of your commercial lease, such as a minimum notice period. After that, youāll have two options:
- Rent out your property to another business
- Sell the property
If you sell your property, youād have added to your pension pot through tax-free rental payments, and youād hopefully have made a profit on the property value, which would also go back into your pension tax-free. The sale is also free of capital gains tax as it is held within a tax efficient pension. You have the option then of either making a different investment or, if youāve reached the minimum retirement age of 55, start to draw down that pension
Every investment comes with a risk
Values can go up or down, and you might not get back the original amount invested.
- If your property has made a loss at the point you sell it, your pension will also make a loss.
- Under current legislation, you canāt access your pension funds until youāre 55. Meaning that any profits you do make on the sale of your building will be locked away until retirement.
- Also, converting property investments into cash isnāt always a quick process, and that can impact on how long it takes to access the funds.
The responsibilities of property ownership, such as maintenance costs, should also be taken into account. This is especially important if youāre renting the building out to another business and arenāt there to oversee how itās being used on a daily basis.
Some business owners would also prefer to buy the building of their choice, even if it is in poor condition, without having to run it by anyone else first. It all depends on how much control you want to have over your property investment.
Getting started
As with any investment, the first step is to get in contact with an independent financial advisor. They will be able to explain pension assets in more detail, assess your individual circumstances to make sure that investing in property for retirement is right for you, and guide you through the process.
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.
