Self Invested Personal Pension (SIPP)

Posted: 11th Oct 2016 by Nick Lawson Pensions, Wealth Management

SIPP – Self Invested Personal Pension – A Case Study

Could a Self Invested Personal Pension Plan work for you?

Our example below gives guidance on when it may be appropriate to use this option.

Background

Andrew is considering a purchase of a commercial property he has seen with a good rental yield available for £285,000. After discussing his options available to him with his Financial Adviser he wishes to purchase the property via a Self Invested Personal Pension (SIPP).

Existing Personal Pension

Andrew already has an existing personal pension with a transfer value of £100,000 and based on his current earnings, together with use of the carry forward provisions, he could make an additional net pension contribution of £80,000 and benefit from an additional £20,000 tax relief.

This gives Andrew a total of £200,000 and therefore is £85,000 short of the purchase price. In addition, an allowance should be made for additional costs including Stamp Duty Land Tax (in this case 0% on the first £150,000 ; 2% on the next £100,000 ; 5% on the balance of £35,000 = £3,750 in total) and other items including his adviser’s fees.

Andrew’s Financial Adviser recommends a figure of £300,000 should be sufficient in total. Under current legislation Andrew’s SIPP can borrow up to 50% of the net value of his scheme, i.e. maximum borrowing is £100,000 giving a total maximum amount for the scheme as follows:

Existing Pension Provision £100,000
plus Net Pension Contribution £80,000
plus Basic Rate Tax Relief £20,000
plus Borrowing £100,000
Total £300,000

Important Notes:

Rental Income and Tenants

Andrew’s SIPP would need a tenant (which could be his own business), paying a commercial rate of rent.
Rental Income must be at least 110% of the amount of loan repayments (if fixed rate interest) or 130% if variable rate. We examine each case on its own merits.
Further contributions can be made, within available annual allowances.

Tax Relief

As Andrew is eligible for tax relief, his SIPP provider will claim basic rate relief from HMRC, and this takes time for them to receive. If the tax relief is essential to fund the purchase then early payment of the contribution should be considered.
If Andrew is entitled to tax relief at the higher (40%) or upper (45%) rates, then he can claim the balance via Self Assessment.

Additional things to consider:

This is a simple example to show how the calculations work, and ignores various costs which would need to be taken into account — e.g. Minerva SIPP fees; adviser charges; Stamp Duty Land Tax (for property purchases over £150,000); Value Added Tax; legal fees; valuation fees; and costs involved in insuring and maintaining the property.

It is also possible for schemes to have multiple members and for property purchase to be phased over a number of tax years.
All rates and allowances are based on 2016/17 tax year, unless otherwise stated.
Note: Individuals or companies interested in Self Invested Pension Schemes should always consult a suitably qualified professional adviser.