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Using property to plan for retirement

By Raymond Mulligan

Question: I have amassed a reasonable sum within my pension and am thinking about buying a property with it, can you explain what this involves?

Answer: What you are proposing to do can be a very efficient way of planning for your retirement, but it is important to consider all the implications before you decide to go down this route.

All too often I meet people who have used a pension fund to buy property only to find out afterwards that it was not the best thing to do.

The first thing to mention is that only commercial property can be purchased by a pension fund.

A number of years ago there was a proposal made by the then Chancellor, now Prime Minister, Gordon Brown that residential property could also be purchased but this was subsequently altered. Therefore, many people who run their own business use the pension fund either to purchase new premises from which the business can run, or even purchase the existing building from themselves or the company. This is probably the most common approach.

The reason that this works effectively is that any rent paid by the company is in effect put towards the pension fund and therefore can be used to repay any borrowings, rather than it being paid to a third party landlord.

These rental payments are fully relievable as a business expense, and again are a tax efficient method of withdrawing money out of a business while building up a retirement pot for the business owner.

Once the property is inside the pension fund, then any capital growth is also free of tax, so many people are looking at doing this in the current climate, particularly if they currently own the property personally.

This is because to move it into the pension fund while property prices are depressed could result in the saving of personal capital gains tax.

An issue to consider carefully before placing the property within the pension fund is the costs involved in such a transaction.

Firstly for a pension fund to hold property it must be a Self Invested Pension Plan (SIPP) or Small Self Administered Scheme (SSAS).

These types of arrangements carry higher set-up and running costs in comparison with straight forward pension plans, so you need to make sure that these are fully researched and understood.

The next layers of costs that you need to take account of are the normal costs involved in making a property purchase.

These will include legal fees and stamp duty (which are payable even if you are effectively buying the property from yourself or your company).

In certain situations you can avoid the stamp duty, but advice must be sought as to how to do this. In addition to these costs, the pension provider may also charge certain fees to execute the transaction.

It is often said that when you make a significant property purchase you should consider how you will exit, or sell the property before you buy. This is very relevant when considering the use of the pension fund as a means of buying property.

Ultimately the pension is designed to provide a tax free lump sum and income in retirement. If your entire fund is tied up in property this may not be possible and may mean a forced sale at some future point in order to facilitate your retirement.

Other things to consider are the effects of taking property of a company balance sheet as well as the restricted leverage imposed on pension funds to borrow monies. As ever, seek out professional help in order to way up the pros and cons fully.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact or (028) 9022 1010

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