Download SHOULD RESIDENTIAL PROPERTY BE ALLOWED WITHIN

SHOULD RESIDENTIAL
PROPERTY BE
ALLOWED WITHIN
PENSION SCHEMES?
A survey of interested parties in
response to the Government’s
announcement to consult on the
conversion of unused space in
commercial properties in high streets
and town centres to residential use
Budget 2013: Public Spending - Housing 2.18
Changes to pension investment rules to encourage the
conversion of unused space in commercial properties.
SHOULD RESIDENTIAL PROPERTY
BE ALLOWED WITHIN PENSION SCHEMES?
“
“
The Government will explore with interested parties
whether the conversion of unused space in commercial
properties in high streets and town centres to residential
use could be encouraged by amending Investment
Regulated Pensions Schemes rules. Any amendments
would need to be consistent with sound public finances
and the Government’s wider pensions strategy.
Contents
Page 4
The Survey
Page 5
The Concensus View
Page 6
Voting By Financial Advisers
Page 11 Voting By SIPP and SSAS Operators
Page 15 Voting By Property Investors
Page 20 Voting By Members Of The Public
Page 25 Observations
Appendix
Page 29 The Case For Allowing Private Pension Fund Investment In Housing
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SHOULD RESIDENTIAL PROPERTY
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The Survey
The survey was conducted by SIPPclub. Relevant information was provided on a
single voting page at http://www.sippclub.com/residential-property-in-a-sipp/.
To obtain the concensus view from the widest group of ‘interested parties’, during
the one month voting period which closed on 24 May 2013, regular information
was made available to the following groups:
•
•
•
•
Financial Advisers
SIPP and SSAS Operators
Property Investors
Members of the Public
Communication was delivered by direct approach to key centres of influence in each
of the above areas, and more generally via relevant interest groups on Facebook,
Twitter and LinkedIn. Included in the circulation were online and offline ‘Meetup’
groups. It was also discussed in a variety of online financial advisory and propety
focused forums.
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The Concensus View
Based on the total vote, the conclusion is as follows:
87% of the people
who voted believe residential property
should be allowed within pension schemes
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SHOULD RESIDENTIAL PROPERTY
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Voting By Financial Advisers
Based on the total vote of Financial Advisers, the conclusion is as follows:
81% of the Financial Advisers
who voted believe residential property
should be allowed within pension schemes
33% of the Financial Advisers
who voted have a SIPP
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BUY TO HELP
BE ALLOWED WITHIN PENSION SCHEMES?
Comments from Financial Advisers
A selection of comments from those who voted “Yes”
• I feel that residential properties give more opportunity to get capital
appreciation and better income. Why discriminate?
• All investment property should be allowed in a SIPP.
• Will get housing market a much needed boost.
• Any change in legislation which facilitates growth of the UK economy is good.
Any change in legislation which facilitates growth of the UK electorate’s
pensions through direct investment into residential property will be very
welcome!
• I believe it will boost the economy and housing market releasing much needed
liquidity to both.
• If they allow commercial property, why not allow residential property,
especially as part of a rental property portfolio.
• The property market needs a cash injection, property values would rise giving
lenders more confidence on loans at higher loan to values therefore helping
first time buyers.
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• Investment property only, not personal dwelling. These are commercial
investments and make up a proportion of clients prepartion for retirement.
These should benefit from being in a tax shelter.
• A SIPP’s ability to transact in commercial property (either with or without
mortgage funding) can be a considerable advantage. Surely, there could be
similar merits to transacting in residential property. Over the longer term,
it might also have positive implications for the stock of affordable housing.
Building companies would potentially have access to a new customer base.
• The pension market place must develop to attract new investors and give
existing scheme members diversified investment opportunities. Liquidity
will undoubtedly cause problems when drawing benefits. Further reason for
ongoing advice and management.
• The wider economic stimulus it would provide plus the further diversification
of available pension investment strategy to reinvigorate the public’s attitude
toward saving for retirement.
• This will help the devlopment of a strong rental market and add more funds
into the housing market.
• With a housing shortage and a growing population, taking vast untapped
pension resources to invigorate both the housing market, all associated with it
and the economy in general can only be positive.
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• It provides an investment avenue without having to use some form of OEIC.
It is ridiculous that residential property is excluded for political reasons.
• There are a lot of properties and development opportunities which may not
be financially viable in the normal market but could become viable if SIPP
benefits were available.
• A wider choice of asset classes and the fact that current ‘commercial
proeprty’ rules restrict many potential investments into shops which have
residential above.
• Secure investment for clients. Ideal and done correctly can benefit the
economy in a number of ways.
• The most “liquid” form of real estate investment in the UK. Massive housing
shortages needed addressed and the public need better returns on their
pensions.
• It is an investment asset in the same way as any other.
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Comments from Financial Advisers
A selection of comments from those who voted “No”
• The overall economy is already too dependant on property whether
residential or commercial---let’s get the money in to the industrial base so
that the wealth becomes real!
• Demand could force up property values making it harder for first time buyers
to get onto the property ladder.
• The restrictions on access to capital from a pension plan make them
inappropriate vehicles to hold residential property.
• Will inflate an already inflated market.
• Further rise in property prices and pricing out younger people.
• I believe it will put a bubble in the housing market again.
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Voting By SIPP and SSAS Operators
Based on the total vote of SIPP and SSAS Operators, the conclusion is as follows:
67% of the SIPP and SSAS Operators
who voted believe residential property
should be allowed within pension schemes
28% of the SIPP and SSAS Operators
who voted have a SIPP
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Comments from SIPP and SSAS Operators
A selection of comments from those who voted “Yes”
• Because it can be already but the current rules encourage people to do it
through complex vehicles which create risk and cost.
• Briefly, with a personal view, many SIPP holders who would normally only
hold funds on deposit are trying to find an investment that will produce
higher returns whilst remaining “secure”. They also feel more comfortable
with residential property rather than commercial. The government are also
keen to kick-start the economy and one of the main areas they look at when
considering the fiscal pointers to determine if UK Ltd is beginning to turn the
corner is the construction sector. Personally I think it is a no-brainer as there
are £m of pension funds on deposit waiting to be invested.
• I believe it will boost the economy and housing market releasing much needed
liquidity to both.
• 1. It will help boost the housing market and regeneration of empty spaces.
2. Rental income can be used in a more tax efficient way as pension
contributions. 3. Property is a good asset for balancing risk in a portfolio. 4.
If land/property is part of residential development which is going to be sold/
rented for profit this could be viewed as a commercial investment.
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• Residential property is an asset class already established as offering investors
long term returns. I would, however, exclude a persons own residence and
any personal use of the property in question.
• It will generate much needed liquidity in the housing market, with a
beneficial effect on the economy through an increase in employment. At the
same time, it will allow many unused properties to be brought back into
use. With today’s very low interest rates, it will give an additional source of
investment return. There will be some downsides which could be controlled
by setting rules that limit exposure to residential property in some way, with
the flexibility to change those rules in future.
• Help the economy by releasing funds that banks are unable to do because of
their dreadful balance sheets.
• We operate a true SIPP offering true self-investment, adding residential
property as an investment option widens the investment scope -which is
what a SIPP should be doing. Whilst there should be restrictions in place, the
general concept mooted here is a good one.
• Giving clients more options.
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BE ALLOWED WITHIN PENSION SCHEMES?
Comments from SIPP and SSAS Operators
A selection of comments from those who voted “No”
• Most people’s biggest asset is their house and therefore to have their pension
in that is well will only cause problems at some point.
• It will create a class of toxic assets which will be impossible to transfer as
it will be used for connected party occupation thus creating substantial tax
charges for members and operators. The cost and difficulty of monitoring
the use of the property makes it a vary unattractive proposition for a SIPP
Provider.
• There is a big difference in buy to let purchases to purchasing commercial
property within your pension plan. Buy to let you will have access to your
money if you need to or decide to sell. Sipps if you sell the funds are left
within your pension scheme until retirement. If you gear a pension by
contributions the funds remain there.Yes there are tax advantages but as a
long term financial plan is this right for all individuals? Potentially at present
there are too many unknowns with the proposition.... so for now my personal
view is no.
• Residential property will be too hard to police against abuse of tax-relieved
pension savings.
• None of the reasons why residential was rejected before have gone so why is it
acceptable now when in wasn’t 7 years ago?
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Voting By Property Investors
Based on the total vote of Property Investors, the conclusion is as follows:
94% of the Property Investors
who voted believe residential property
should be allowed within pension schemes
46% of the Property Investors
who voted have a SIPP
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Comments from Property Investors
A selection of comments from those who voted “Yes”
• Because we are extremely limited in SIPP’able’ assets. The most common
being conventional property, some even under a commercial license are still
being rejetced!!!
• It’s a sound bricks and motor investment just as sound as other commercial
options and may be more so.
• Allowing residential property in SIPPs will strengthen the UK property
sector and get it moving again.
• Converting office assets will be a good way resolve empty office voids. It
is a major distortion of the market if Sipps have to sell assets to realise this
alternative use as it adds disposal costs,stamp duty and reinvestment costs that
are not otherwised faced by other proprty owners.
• To stimulate the Property Sector and to increase Savings options to Pensioners
currently receiving low interest rates on their savings.
• The UK needs more housing. If structured correctly, SIPP Investment into
new buy to let housing development could help solve the housing crisis.
• It will boost the housing stock and revitalise the High Street.
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• I believe it will boost pensions and at the same time boost the housing sector.
• To help ease the housing crisis and to re-energise Britian’s dying high street.
• It’s a safe secure asset class that many people would like to invest in. Why on
earth should it be excluded?
• It will stimulate the property market. It will clean up high streets which are
becomingly increasingly depressed with vacant lots everywhere. Residents
will likely shop locally, helping the local retail economy. It will provide
another investment vehicle which is no more risky than financial products.
Investing in property was mooted previously. Property has historically
delivered a better return than e.g. managed funds. The more a SIPP can grow,
while GAD rates remain low, the more will be left to the Government to tax
at 55%.
• Haven’t seen any persuasive arguments justifying differentiating between
residential and commercial property, and why only the latter qualifies for a
Sipp.
• Lack of liquidity in commercial development markets because of restrictions
and lack of lending can receive some relief.
• Because some serviced apartment schemes even with C1 /C3 planning, can
under inspection be classed as non SIPPable.
• Why not, this will allow so much more activity in the market.
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• My pension is not growing at all. It will not generate any worthwhile
income at retirement, so it’s pretty pointless ‘as is’. I could create a solid
future income through property if I could access my pension and use if for
investing in residential property, and I would also be stimulating the economy
by providing work for trades/builders AND be providing much needed
accommodation for others.
• Residential rentals are a stable , permanent part of the property scene (and
have been since the introduction of shorthold tenancies). People are choosing
to stay as long term renters due to demographics and especially social
changes.
• As the owner of a HMO, it is very much a commercial investment,providing a
service to paying customers, so why should it not be treated as any other class
of commercial asset?
• Shares in the stock market are allowed and yet I would consider these riskier
than property. Also I have heard that pension funds are allowed to invest in
property so what’s the difference?
• All BTL properties are treated as a business similar to commercial property
so what’s the difference?
• Monetising unused resources in times of austerity. What’s not to like?! There’s
no logical reason why one should be able to invest their SIPP in commercial
but not residential - opening up the latter can only serve to relieve the
pension crisis.
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Comments from Property Investors
A selection of comments from those who voted “No”
• Rather than make this residential vs. non-residential, there needs to be a way
to restrict the use when held by a pension.
• On the whole No. There are 2 underlying factors. 1. It will cause property
prices to increase of magnitude proportions, This is not what we require. 2.
This will lead to a flood of rentals and will collapse the rental market as an
over supply forces prices down. This could create gettos and that is the last
thing we need. But if restricted to part resi/commercial mix maybe. It should
be policed carefully and proceed with caution.
• Whilst personally I might benefit if residential proeprty was allowed within
pension schemes, overall it would not help the UK economy. Instead pensions
should be used by the Government to funnel investment to where it is needed
eg high value manufacturing.
• Because of the massive distortion it will make to the UK property market.
• It will simply inflate the property bubble even faster and the eventual
correction will be far more severe.
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BE ALLOWED WITHIN PENSION SCHEMES?
Voting By Members of the Public
Based on the total vote of Members of the Public, the conclusion is as follows:
91% of the Members of the Public
who voted believe residential property
should be allowed within pension schemes
60% of the Members of the Public
who voted have a SIPP
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Comments from Members of the Public
A selection of comments from those who voted “Yes”
• It is an easy to manage asset and should produce good income and capital
growth for a pension owner.
• To allow SIPP’s to invest in a broader range of investments and to stimulate
the residential property market.
• More to the point - why not? A capital asset generating income/growth
should surely be allowed within a pension scheme.
• Alternative funding to support regeneration within disadvantaged areas and
the High Street. It would also support the construction industry and help the
UK recover from the recession.
• Why should there be any differentiation between commercial and residential
properties? Both have adavantages/disadvantages.
• Caveat that owner-occupation and connected parties cannot be allowed to
dwell within the property. In this scenario, it is simply an investment like
many others.
• Because it is a legitimate store of potential value and should be allowed for
that reason.
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• It is by far the main private investment being made by a majority of the
population from either moving from larger main residences to rent these out
for an investment income, or to buy to let properties.
• There are millions of pounds held in cash in pension funds that would be
invested to boost growth in the property market and provide homes.
• Stock market performance is simply too unpredictable nowadays and other
options are needed which better allow for growth as well as an element of
capital protection. Property fits the bill.
• To increase housing availability.
• I think that when you invest, it’s really important to invest in something that
you understand and it’s fair to say that most people understand residential
property! Although I do agree that any pension investment must be made
using a structure that stops the SIPP Investor from taking any personal benefit
before retirement age so anyone thinking of a tax free holiday holiday home in
the sun can think again!!
• Residential property is almost guaranteed to increase in value. Commercial
enterprises can fail and the locale of the business may mean no growth comes
from the property as change of use caveats may exist or area may not suit new
e-style business.
• Why not? Investment is a good thing isn’t it?
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• Less volatility in rental income and property growth from residential
property would be particularly useful option for those nearing retirement and
for those in income drawdown.
• A more reliable form of income production with potential to offset inflation.
• Let’s hope the government sees sense and opens up this area for investment
as I see it as a win/win situation. It provides the opportunity to tap into large
SIPP funds to give the residential property market a much needed boost at
a time when banks don’t seem too keen on granting mortgages and I will be
able to invest my SIPP in this area instead of more risky stock market funds.
• Shortage of residential property is a well-known structural issue in the UK
property market; it makes sense to map the over-supply of empty space
(commercial) to the latent demand in the residential market.
• A guarded yes. I think properties directly owned by the SIPP holder should
be excluded. It would be too easy to cloud sound investment decisions by
“lifestyle” requirements.
• Can’t wait to invest my Sipp into residential property instead of relying on the
Stock Market and its alarming crashes and recoveries.
• Help support the economy and give a major reason for people to take more
interest in their retirement planning.
• It could help ease the housing crisis.
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Comments from Members of the Public
A selection of comments from those who voted “No”
• Too risky though many people rely on property rental income for their
retirement.
• Stops young people from buying their own home. http://www.sippclub.
com/sipp/i-want-to-raise-money/form-for-lending-opportunity/
• It would invite tax avoidance and make adverse changes to the taxation of
pensions more likely.
• I think it would be a difficult and complicated piece of legislation to put
through Parliament. It could lead to an unintended rise in Equity release in
the future.
• You don’t want all your eggs in one basket.
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Observations
A number of key ‘interested parties’ were sent the results of the voting once the
survey was closed. Here are their observations.
Name:
Title:
Company:
Website:
Adam Tavener
SIPP Operator - Chairman
Clifton Asset Management Plc
http://www.pensionledfunding.com/
With the correct exclusions (main residence, connected party etc), there is no
reason why residential property should not be considered an appropriate asset
class for pension investment. It clearly has been considered an investment class
by millions of Britons for many years and, despite its ups and downs, has created a
substantial wealth base.
The conclusion of this survey categorically indicates this would be a welcome change
in legislation. An Financial Conduct Authority special permission category should
be created for those intermediaries who want to advise clients on this, amongst
other classes of non standard investments. This will safeguard the consumer whilst
keeping genuine choice in the marketplace.
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Name:
Title:
Company:
Website:
Rod Thomas FCA
Property Investor / Investment Adviser - Managing Director
Avantis Wealth Limited
http://www.avantiswealth.com/
The current state of the pension market in the UK is little short of disastrous. The
investment focus on mainstream pension schemes is almost completely on shares
and bonds. Both of these have performed very badly over many years - in the case
of shares there is little growth over the period since 2000 - more than 13 years.
Any solution has to include a far wider spread of investments. Whilst commercial
property is currently allowable, the specialist nature and limited availability means
it will never provide more than a very small percentage of the requirement for
a new asset class within the pension investment arena. The potential inclusion of
residential property within UK pension schemes could dramatically increase the
scope of pension fund investment and, through improved performance, widen the
opportunity for investors to do better in retirement.
Historically residential property has shown less volatility and greater income
generation than a typical share portfolio. The long term nature of investment in
property is well suited to the long term nature of a pension scheme. There is a
strong case to be argued for the inclusion of both residential property located in the
UK and Internationally within a pension scheme.
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Name:
Title:
Company:
Kevin Whelan
Independent Financial Adviser - CEO
Kingswood Law IFA Limited
With the continuous roller coaster ride on the stock market this opportunity would
allow funds to be invested in an asset so revered here in the uk - property. Investors
would benefit from the security and more houses would be built. What a fantastic
win/ win.
This survey shows the vast majority of professionals and lay people agree.
Name:
Title:
Company:
Website:
Nick Carlile
Property Investor / Mentor - Managing Director
Platinum Portfolio Builder
http://www.platinumportfoliobuilder.co.uk/
Allowing residential property into SIPP’s will undoubtedly improve the UK
property market for the short and the long term. As investors, we are currently
making the best of the market at the moment with some great opportunities. By
allowing SIPP funds into the market it will create growth that most investors would
welcome.
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Name:
Title:
Company:
Website:
Rob Moore
Property Investor / Mentor - Co-Founder Progressive Property
Progressive Property
http://www.robmoore.com/
In line with the vast majority of people who have voted in this SIPPclub campaign,
I believe residential property should be allowed within pension schemes because:
1. Pensions are another form of readily available finance which bridges the gap
from the reduced lending environment legacy of the credit crunch.
2. People saving for pensions often get poor returns in traditional pension
schemes; residential property offers a viable alternative they can understand.
3. Lot sizes are much smaller with residential. Reality with SIPPs or SSAS
pensions is that you can only borrow 33% LTV meaning you need £200k+ in
cash in pension just to buy a small £300k commercial property.
4. It helps to fix a national need: more rental accommodation. Pensions could
also be used in conjunction with developers to invest in more property.
Name:
Title:
Company:
Website:
Mark Walker
Property Investor - Director
Walker Haynes Limited
http://www.walkerhaynes.co.uk/
Any legislative change that allows, encourages or facilitates additional property
development through new schemes of investment in the UK is good news for our
economy.
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Appendix
The Case For Allowing Private Pension Fund
Investment In Housing
In May 2003, the British Property Federation positioned a paper entitled “The case
for allowing Private Pension Fund Investment in Housing”. As many of the issues
raised in the paper are relevant to this consultation, it’s reproduced in full below.
Top Line
• The UK needs to attract private capital into housing to help address shortages,
to meet increasing demand resulting from demographic changes and raise
standards.
• There is significant demand from private pension funds to invest in residential
property, either directly or indirectly, but current regulations on Self Invested
Personal Pension Funds (SIPPs) and Small Self Administered Schemes (SSASs)
prevent this.
• The regulations are tightly drafted to prevent pension funds investing in
members’ homes and holiday homes.
• However, they also prevent other forms of investment in residential property
by SIPPs and SSASs and hence deprive the UK of £billions of valuable
investment in quality housing.
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FPD Savills estimate that £2bn a year of investment in the private rented sector
will be needed over the next two decades to cater for expected demand (Private
Renting: A New Settlement - A commission on standards and supply, Shelter/Joseph Rowntree
Foundation, 2002).
The question, which this paper addresses, is whether this investment area that is
generally available to all investors, should continue to exclude SIPPs and SSASs.
Residential property - a new asset class:
Historically, significant private investment in rented housing was discouraged by
the fear that tenants would have security of tenure at rents which were not linked
to inflation, causing the freeholder to be left with a long-term, illiquid investment.
Following the changes introduced in the 1988 Housing Act, however, these
problems have disappeared; perceptions have changed and returns have encouraged
new investment both from the buy-to-let investors and via some institutions.
There are now institutional products available, which invest in residential property;
below are some examples:
Company
Close Brothers
Aberdeen Property Investors
Schroders
ING Barings
Product
Capital Appreciation Trust
Regent Residential Partnership
Residential Property Unit Trust
Baring, Houston & Saunders Redisential Fund
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However, compared with institutional investment in residential property in other
European countries this is miniscule. The chart (next page) is based on IPD data
(with a partner organisation KTI in Finland). It shows the tremendous potential
investment that could come from institutions in the UK if the right conditions were
created and European levels were met, although admittedly not all of this would be
down to SIPPs.
The attractions and pitfalls of property for private investors:
There are fears that people should not be encouraged to invest in residential property
because they already have a substantial stake in the sector via home ownership.
SIPPs are therefore prevented for investing in any residential property.
However, individuals wanting to invest in residential property in recent times have
been able to do so via the buy-to-let market. It has encouraged heavy borrowing and
a very narrow investment strategy, focused perhaps on just one property, which is
riskier than investing in a collective scheme. Council for Mortgage Lenders figures
(press release dated 11 March 2003) show that at the end of 2002 there were an
estimated 275,000 buy to let mortgages outstanding worth £24.2 billion. Average
loan to value ratios have remained at 80%, and the average minimum rental cover
requirement (the proportion of the mortgage payment that the lender requires the
rent to cover) has remained at 130%.
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This trend holds risks for the individual investors, for their tenants, and for the
wider housing market. Data provided by the Investment Property Databank (IPD
Residential Investment Index 2002), drawn from institutionally owned portfolios
of let houses and flats valued at £765m show average costs of 37% of gross income,
significantly more than the CML minimum rental cover. Even the figures from
ARLA (Association of Residential Letting Agents), who heavily promote Buy to
Let, suggest that maintenance and repairs need not be considered when looking
at a five year investment in residential property. Their Index of Returns on Buy to
Let assumes 6%.
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These figures do not include agents’ fees and charges or any estimation of the costs
of minor repairs and maintenance. The fear must be that a large number of private
tenants will live in properties managed by amateur landlords who will have made
an inadequate allowance for the costs of repairs and maintenance.
Buy to Let investors compete with owner-occupiers to buy existing housing stock,
rather than assist in the creation of additional supply.
Most major pension fund consultants recommend that a diversified investment
portfolio should contain property and there are good reasons why residential
property should be make up a proportion of a diversified pension fund:
• Analysis of optional portfolio performance over the past twenty years clearly
demonstrates that risk adjusted returns are enhanced by an allocation to
residential property alongside commercial property.
• A critical feature of pension fund investment is its ability to provide a match
for wage inflation in order that the end value of investment is sufficient to
meet the needs in the future. Residential property investment provides a
good match for wage inflation, since the rents paid to occupy property as
a proportion of total earnings, would be expected to remain reasonably
constant. There is therefore, a closer link between the entity paying rent and
the pension investor recipient than is the case with commercial property and
corporate tenants.
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• Residential property investment has provided less volatility in performance
than commercial property. In simple terms, when a commercial property
investment suffers from a weak occupier market, its rental value may fall, and
since investor demand may fall concurrently, the impact on capital values may
be significant. Contrast this with the equivalent situation in the residential
sector, where given that occupiers have a clear choice between buying and
renting, it is more often the case that when the rental market is weak, capital
values are well supported (typically, as owner occupiers support prices and
values are moving upwards rental demand falls, and when capital values fall
rental demand increases.)
Lost investment in housing:
As well as running counter to good investment practice the current restrictions are
depriving the UK of substantial investment in housing.
The SIPP Provider Group estimates that there are currently in excess of 50,000
(figures taken from the SIPP Provider Group website) SIPP schemes and with the move
away from defined benefit to defined contribution schemes they predict that the
number of plans could increase to 500,000 by 2010 (figures supported by Personal
Pension Management Ltd). The size of the market for property funds is therefore
considerable. Assuming a very conservative 5% of the current £10bn2 in SIPPs was
invested in residential property - that would be £0.5bn of investment in private
rented housing. If these figures were projected forward on the basis of anticipated
growth, the figure would be £5bn by the end of this decade, making a sizable
contribution to the private rented sector’s investment needs.
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SHOULD RESIDENTIAL PROPERTY
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The current restrictions on SIPPs, however, prevent this potential investment going
into housing and can lead to other side effects. For example, the current rules also
stifle investment in particular kinds of properties, such as flats over shops, because
of their residential element. The effect of this is to deprive investment in a type of
property which is often located in town and city centres and which could provide
excellent key worker accommodation.
The British Property Federation (BPF) conducted an informal survey of Independent
Financial Adviser and Pension Trustees last year:
• 88 responses were received.
• The majority were from Independent Financial Advisors (IFAs) & pension
fund trustees, plus a small number from accountants and solicitors.
• The replies showed a strong support for a change in the law and many
provided examples where current legislation had affected investment
decisions.
• Only three replies disagreed with changing the law to allow SIPP investment
in housing.
Some feedback:
• C. Ltd estimate their total funds currently held in SIPPs to be in the region of
£300m and if restrictions were to be lifted then £30m could be attracted to
residential property investment.
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SHOULD RESIDENTIAL PROPERTY
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• A.J., who consider themselves a small practice, anticipate that “out of funds
under management, approximately £10-15m could be earmarked for such
residential property investments and the same again could be attracted in new
business opportunities within a 12-24 month period.”
• F.T.: “Generally speaking residential units are more suited to SIPPs & SSASs
because of their size and marketability….depending on circumstances we
would recommend that anywhere between 10% and 50% of self invested
funds should be invested in residential property.”
• I. Ltd (IFA): “I can state fairly confidently that for the majority of our existing
pension fund clients, their first choice investment would be in a residential
investment property due to the track record of this sector coupled with
the investment yield. A pension fund is an appropriate vehicle for property
investment due to the long-term nature of the investment. This is because
the unit cost of properties is generally lower and a fund might hold several
residential properties. There would be a greater security of income yield to
the fund through a multitude of diverse tenants. If investment in residential
property was permitted 20% of our clients would invest in this area.”
• B. (Chartered Accountants) say the current regulations are “unfair, illogical
and restrictive” and create unwanted barriers for investors.
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SHOULD RESIDENTIAL PROPERTY
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• This is supported by an example from C.M. (IFA), who were: ”…asked
recently to arrange a SSAS for a client where a Post Office was going to
be purchased for 60% of the square footage whilst 40% was a first floor
residential element. This was deemed permissible by the Pension and
Superannuation Office and demonstrates the irrational nature of not allowing
residential property investment in pension funds.”
• G. (Chartered Accountants) – “In every case where I have been advising
strategically on pension planning and upon the asset mix, over the last three
years, the one principal query is whether investment in residential is allowed.
There is significant pent up demand from pension funds, which are as a result
forced to invest either in traditional stocks and shares or in commercial
property. This has led to reluctant investment in assets providing a lower
return.”
• N.S.C., a practice advising over £1bn of funds comments, “that perhaps 20%
of such funds… could be directed into the residential sector should the ban
be lifted. It would be beneficial to the schemes and to the housing market.
The company acts as advisor to a number of housing associations and is,
“particularly aware of the need to attract private finance into the residential
sector.”
Several of the respondents held portfolios, which included residential and
commercial and provided examples where the residential part could not be
refurbished because it was uneconomic to do so under the current regulations:
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SHOULD RESIDENTIAL PROPERTY
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• G.F. & Co (fund size £8m) gives examples of two clients affected by the
current situation: “One particular client owns a shop which he occupies as
his business and has had four offices over his shop which he has been unable
to rent out for the past 4 years. During this time he has received planning
permission to convert these offices into a flat, which would increase income
to his car park. He is unable to utilise this planning permission due to the
restrictions limiting SIPP and SSAS investment.”
Allowing investment in housing by SIPPs, particularly via collective residential
funds, would help serve many of the Government’s current housing objectives.
1. There is a huge demand for one and two bedroom properties in urban areas.
Capital is needed to satisfy demand and the pension fund market is an obvious
provider.
2. More generally, collective funds are likely to want to invest in quality housing,
helping to raise the overall standard of stock in the private rented sector.
3. Collective fund investors would generally seek to have their investments
managed by professionals and would therefore contribute to raising
management standards in the private rented sector.
4. Altering the rules would allow SIPPs to invest in mix-use schemes and
therefore stop the current incentive to leave flats over shops empty.
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SHOULD RESIDENTIAL PROPERTY
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The current restrictions on SIPPs and SSASs:
The current guidelines from the Pension and Superannuation Office expressly
forbid the investment by SIPPs and SSASs in residential property. There are three
specific exemptions to this as follows:
1. Residential freehold ground rents.
2. Property that is occupied as a condition of an employee’s employment.
3. Property occupied in connection with the occupation by someone’s business
premises held as an investment by the SIPP.
These guidelines are contained in the Personal Pension Schemes (Restriction on
Discretion to Approve) (Permitted Investments) Regulations 2001 which came into
force on 6 April 2001.
In the case of SIPPS, but not SSAS’s the exclusion includes tax-exempt unauthorised
unit trusts that hold residential property. There is, however, no restriction of the
assets that can be held by companies the shares of which can be purchased, provided
that they are listed on a recognised stock exchange. Exposure to the sector can
therefore only be gained in an indirect from, which tends to be more costly to the
investor and thus to reduce overall returns.
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SHOULD RESIDENTIAL PROPERTY
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It is clear from the comments therein regarding what constitutes an acceptable
ground rent investment that the principal concern is that the pension fund may
purchase the home of the scheme member (or the home of a person connected
with that member), which would allow them to benefit from double capital gains
tax exemption.
Solutions
We fully agree that it would be entirely inappropriate for pension funds to purchase
the homes of their members. However, the current restrictions not only serve to
prevent this but also serve to prevent any other investment in housing, whether
through the direct purchase of a property or by way of investment through collective
funds.
Direct ownership of property:
Most trustees of pension funds take their role very seriously. A simple statement
of restriction to bar pension funds from purchasing properties owned by their
members or people connected with them would be sufficient to prevent an abuse
of this nature. Indeed, this methodology is what the existing rules rely upon and we
see no reason why the exclusion could not be drafted so that it is more accurately
aimed at the problem.
Investment in collective schemes:
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SHOULD RESIDENTIAL PROPERTY
BUY TO HELP
BE ALLOWED WITHIN PENSION SCHEMES?
Investment in collective schemes is, arguably, a more complex issue, but one that
is even easier to solve. The principal apparent problem is that the managers of
the collective scheme will not usually have any great degree of information about
the investor base and one can argue, therefore, that properties may be acquired
which are either owned by the investors or by people connected with them. This
suggestion, however, ignores a number of key points:
1. Since the property acquired will usually be acquired for letting, it must be
vacant upon purchase and is, therefore, most unlikely to be the home of either
the investor or anyone connected with them;
2. If the residential fund was involved in equity release (i.e. where the vendor
of the property becomes a lifetime tenant), there would also seem to be no
inherent problem because the investor would have sold the property for,
presumably, the best price that they could obtain within the equity release
market and, on this occasion, it just happened to be in a fund in which they
invest; and
3. In any collective scheme, the level of investment of any particular investor
will represent only a tiny proportion of the overall fund and their return,
therefore, will only benefit to a tiny extent from what was previously their
property.
4. The existing SSAS regulations contain provisions on acquisition of investments
from scheme members or connected persons, and these could be adapted to
cover residential property as well.
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SHOULD RESIDENTIAL PROPERTY
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Even if these points were not thought to carry weight, it would not be a problem to
impose a requirement on trustees not to invest in collective schemes of which their
schemes’ members are tenants at the time of purchase.
Conclusion
We acknowledge the concerns about pension funds purchasing the homes of
scheme members and we therefore accept the need for regulations to prevent this.
However, as we have illustrated, the unintended consequences of the way that the
current regulations are drafted is that the sector is potentially being deprived of
significant and stable investment. Investors are instead being driven to potentially
more risky buy-to-let investments, or not into housing at all.
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