When looking into any type of investment opportunity, the tangible nature of property can feel more secure than the volatility of the stock market. When it comes to something as important as later life planning, choosing the right investments is particularly important. We look at how to successfully invest your pension in UK property as part of a diverse and stable retirement plan.
Can you invest your pension in the property market?
Although many workplace pensions limit you to a pre-chosen selection of funds, self-managed pensions are increasingly adding property investment opportunities. In fact, holding property within a pension is becoming a popular strategy for many investors, and particularly business owners.
That said, the rules around this type of investment are typically quite strict, and getting it wrong can be costly. Here are some options to consider if you’re planning to invest your pension in the property market.
Commercial Property (SIPP & SSAS)
Unlike standard personal pensions, a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) allow you to purchase commercial premises as investment opportunities.
Business owners often use their pension to buy their own office or warehouse premises via this method, for example. This type of pension scheme can borrow up to 50% of its net fund value for the purchase.The property is then leased back to the business, meaning rent is paid directly into their pension pot.
This is popular because any rent paid into the pension is free from Income Tax, and if the property is sold, there is no Capital Gains Tax to pay.
Real Estate Investment Trusts (REITs)
Introduced in 2007, Real Estate Investment Trusts (REITs) offer a flexible alternative to buying a building outright.
A REIT is a company that owns and operates income-generating real estate. Investing pension funds into a REIT allows you to profit from large-scale property portfolios usually out of reach to individuals, such as shopping centres or residential developments, without committing to being a landlord.
As shares in REITs can be sold much faster than a physical building, this option also provides you with greater liquidity of your pension pot.
Can you invest your pension in Buy-to-let?
You cannot typically use a SIPP to buy a standard buy-to-let property, no, as HMRC rules effectively ban direct investment in residential property for most pension schemes.
Buying a residential or holiday let property through your SIPP will likely result in unauthorised payment charges. These fees can wipe out up to 55% of the asset’s value, making it an incredibly risky investment.
There are some very specific exceptions which include certain types of commercial mixed-use properties, but these are complex to organise. A REIT is the simplest way to invest your pension in residential property.
Should you move your pension into property?
This is a question we put to Lee Trett, director and co-founder of online financial advice service Money Helpdesk. He believes that property can be a viable later-life investment but urges anyone considering it to think about diversifying their capital too.
“As with any financial decision, the best choice will depend on your own circumstances, your financial goals, and your preferences,” he said. “Property can be a solid diversification of your pension pot. However, unlike shares, which can be sold quickly, you cannot sell a third of a warehouse if you need quick cash.
“A robust retirement strategy usually involves a blend of assets. Combining the stability of property with the liquidity of traditional stock investments allows you to build a solid retirement plan that is resilient to economic shifts.
“If you are considering using your pension to purchase property, particularly commercial premises for your business, specialist advice is essential to navigate the borrowing rules and tax regulations.”
