SIPP pension rules for residential property

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The government are set to introduce new rules for private pensions, so that investors can include residential property in their SIPPs pension. The new rules are likely to become law in April 2006. The following is a There will be a single set of investment rules for all pension schemes, removing a complicated set of prohibitions and restrictions for small schemes, used mainly by small businesses. It will set limits on holding shares in the sponsoring employers’ company, and loans to employers, and prohibit loans to scheme members. The new rules will allow all schemes to invest in assets, formerly barred to small schemes, such as residential property or works of art, from which members may derive a benefit. Such benefit, if not paid for by the member at a commercial rate, will be taxed on the member as an unauthorised payment, at 40%. 55 Residential property: The greater investment freedom for SSASs and SIPPs (see paragraph 35) stems from a fundamental principle of simplification: to have a single set of rules for all types of scheme. Although this does deliver a relaxation that many in the SSAS/SIPP sector have lobbied for over many years, it is not the Government’s intention to steer scheme investment into any particular type of asset. It has been suggested in some quarters that allowing these small schemes to invest directly in residential property will cause a significant inflow of pension scheme money into this asset class, distorting the residential property market. 56 Many pension funds can already invest in residential property assets. Simplification changes the current position significantly only for around 200,000 members of SSASs and SIPPS, (about 1.3% of total pension scheme membership of over 15 million) though even they can already invest in residential property via authorised property unit trusts. From April 2006, these schemes will be able to invest directly. But the investment can be leveraged only up to 50% of the value of the funds assets under the new borrowing rules. And the property would need to be sold before an annuity could be purchased. Any income from the property would have to remain in the pension fund (or be liable to tax charges as an unauthorised payment) and any personal benefit on a non-commercial basis, would incur a personal tax charge. Evidence on the distribution of pension fund values at retirement shows that about three-quarters of pension funds annuitised are less than £40,000 in value. These facts, taken together, suggest that it is unlikely that there would be a significant inflow of pension capital into the residential property market from 2006, and any impact of these changes is likely to be small.