Is it a good idea to invest in commercial property using my pension?

Category: Investment&Retirement

Many business owners have used their pension funds to buy the properties where their businesses operate. But now, people who don’t own a business are interested in purchasing a commercial property using their pensions.

However, it’s important to remember that commercial property values can go up and down, and many factors can affect them. It’s essential to think carefully about the property’s location, the tenant’s financial situation, and the type of business they’re in (like retail or office space).

So how does it work?

Commercial property can be bought and held as an investment within a Self-Invested Pension Plan (SIPP) or a Small Self-Administered Scheme (SSAS). Although there are some differences between them, the general idea is the same: invest in property to earn a return on your pension fund.

You can use your pension fund to invest in commercial property in different ways. For example, if you own a business, you can use your pension fund to buy the building your company operates from. If you’re a dentist, you can buy the property where your surgery is located. Or, you can invest in a property you have no connection with.

You can buy different types of commercial properties like offices, factories, and shops, but you cannot use your pension fund to purchase residential property.

You can also pool your pension funds with other people, like family members or other business owners, to invest in a property. This means that everyone’s pension fund owns a part of the property and gets a share of the rental income.

The pension trustees buy the property, and the rental income goes directly into the pension bank account. If they have taken a loan to buy the property, they can repay it using the rent received. You can borrow up to 50% of your pension fund value to buy the property if needed.

For example, if your pension fund is worth £500,000 and the property you want to buy costs £600,000, you can borrow £100,000 to make up the difference. Alternatively, if you have cash, you can make a personal or company contribution to cover the shortfall and claim tax relief.

Is it tax efficient?

If you use your pension to buy a property and rent it out, you won’t have to pay any income tax on the rent that goes into your pension. And if you sell the property, you won’t have to pay capital gains tax either, no matter how much you make from the sale. If you’re a business owner, you can deduct the rent paid to your pension from your business expenses, which could save you money.

Tax may only be payable when you withdraw money from your pension or die. But you should also think about whether the property is subject to VAT.

What are the risks?

Commercial property, like any investment, can go up or down in value depending on various factors. These include how much of it is available and how much people want it. When the lease on the property is renewed, it may not be possible to get the same amount of rent as before, and the tenant might decide to leave or go out of business, leading to a loss of rental income. When the property is sold, if there is little demand for that type of property, it may sell for less than what was paid. It’s also important to know that selling property takes time – it could take months to find a buyer. However, the property can also be used to generate a retirement income through a pension drawdown option.

What about costs?

When you buy a property, there are additional costs you need to consider. These can include fees charged by professionals like lawyers and property valuers, as well as costs for financial advice. There are also costs for administering your pension fund and a tax called Land and Buildings Transaction Tax that depends on the property’s price.

Ongoing costs are also essential to consider. If you lease your property to a tenant, they will usually be responsible for insuring and repairing the property during their lease term. If your property is VAT-elected, your pension fund administrator must submit a VAT return.

Is investing in commercial property a good idea from an investment standpoint?

Deciding whether investing in commercial property is better than other investment options is not straightforward. It depends on your goals, risk tolerance, and personal circumstances.

Investing in commercial property may offer potential long-term growth and steady rental income. However, factors like interest rate changes, economic downturns, and supply and demand can affect property values and rental income. Property investment requires significant upfront costs and ongoing expenses like maintenance and repairs. Selling property to raise funds quickly may not always be easy.

Historically, commercial property returns have been lower overall than a simple 60/40 global equity and global fixed-interest portfolio. This does not mean that commercial property will not outperform, just that the odds are against it.

All investments have risks, and diversifying across different assets can help reduce them. Seeking professional financial advice before making any investment decision is essential.

Investing in commercial property involves risks. These include fluctuating property values and rental income, the tenant’s financial situation, and ongoing expenses. Additionally, investing in commercial property historically has lower returns than a simple portfolio of equities and fixed-interest funds.

Seeking professional financial advice is crucial before investing in commercial property. If you’d like to discuss your pension planning, book a free, no-obligation chat here

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