SIPP Commercial Property Investment Opportunities
A SIPP commercial property investment is a popular option that allows you to invest your SIPP and continue to build your income for retirement. In the past few years the commercial property sector has experienced an impressive boom, but unfortunately, many investors often overlook this sector in favour of residential property investments. With careful planning, you can purchase a commercial property that has the potential to provide you with a steady income during retirement. Before you buy, you need to consider the location of the property, whether you can afford to purchase the property on your own and what type of restrictions and rules you need to follow that have been set in place by the SIPP provider.
SIPP Commercial Property Investment: What You’re Missing
The commercial property sector has the growing economy to thank for this recent boom. According to many financial experts, it’s significantly easier for an investor to hold onto a commercial property in a pension, compared to residential property.
A SSAS and a SIPP are two of the most popular types of schemes that can be used to purchase a property. Which type of scheme is best is debatable, as both come with their own advantages and disadvantages. So what are the main differences between these two types of schemes?
First off, a SIPP is typically used by a person who wishes to have their own personal pension setup. A SSAS is utilised by a group of people. Often, a company will set up a SSAS for high-level personnel. There can be up to eleven people in a SSAS and because it’s directed towards employees it’s also considered an occupational pension.
SIPPS offer more flexibility and are often considered a more tax efficient way to use your pot funds. Unfortunately, a SIPP can only be used for commercial property purchases, not residential properties.
A SIPP holder can use part of the funds to purchase commercial property, however, the amount cannot exceed fifty percent of the property value. Should you decide to purchase commercial property using your SIPP funds, keep in mind that the way you use the funds must meet current commercial expectations and rules. You’re also not able to use any of your SIPP pension funds towards any of your business expenses, should you purchase a commercial property to start your own business as opposed to renting the property out.
Most often, a SIPP pension holder will purchase commercial property in order to take advantages of the tax breaks that come with it. Investing in property using your pension comes with a number of benefits. The tax benefits you can enjoy can work to subsidise the purchase of the commercial property in place of a mortgage. Once a piece of commercial property is held within a pension, you’ll benefit from the full tax relief on gains within the fund. The rent earned from the property will be paid back into the pension, which results in extra income for the investor. This extra income will not be counted as a pension contribution.
SIPP commercial property investment options are also popular among higher earners who face limited contributions. By using a joint ownership structure you can transfer portions of the commercial property over a period of time and successfully avoid going over the contribution limit.
If there is a property you have your eye on, but you don’t currently have enough funds in your SIPP, you can use your SIPP to borrow money, using up to fifty percent of its value. Despite the common belief that finding a bank that will allow you to borrow using your SIPP is difficult work, most financial establishments are very accommodating.
The Disadvantages of Using Your SIPP to Purchase Commercial Property: Is it Worth the Risk?
Every type of pension scheme has its disadvantages. If you purchase commercial property using your SIPP then you’re essentially risking your retirement funds in the hopes of making the right type of investment. Basically, the income you receive during retirement will now depend on the property you purchased and whether you’ll have good tenants that can keep up with the rental payments. Your retirement income is now in the hands of the tenants that rent from you and how successful their business is.
How to Buy the Commercial Property of your Dreams: Combining Other SIPPs
If you have decided to use your SIPP pension to purchase property, you need to be prepared. This is especially true if you plan to purchase property through an auction. You may need to value your pension funds and arrange for their transfer prior to purchase. Because the transferring funds can be tricky you may need to consult with a financial advisor in order to speed up the process and avoid mistakes.
Too often people will spend several months searching for the right property, only to find exactly what they’re looking for and realize the price is just too high. Should this happen, there are a few things you can do to realize your dream and purchase the perfect piece of commercial property. Before you attempt to buy the property, ensure that you’re not stretching your finances too thin.
You can make additional pension contributions as long as they are within the HMRC limits. If you decide not to make additional contributions you can purchase an additional SIPP. Another option is purchasing the property with other SIPPs. You can have fellow directors or partners by grouping SIPPs together in order to afford the right property.
Purchasing commercial property using your SIPP is definitely an attractive option, especially when you consider the tax advantages that come with it. This type of option can offer financial security during retirement, but it also comes with risk. Whether you want to purchase the property for your own business or rent it out to local vendors, your success with this type of investment option can rely on the specific property itself, the interest rate of the SIPP and your individual financial circumstances.