| How To Save Your Pension From the Stock Market
Publication: The Times
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How can you protect your pension investment from current stock market instability, and do some good in the world?
That was the question I asked myself when my pension pot lost 50k and the only comment from Scottish Equitable was that I might like to shift to a less ‘green’ fund.
Then I realised that I could use my pension fund to buy my shop.
Some years ago a coffee chain offered me a deal on the ground floor of my London house. I was using it as an office for myself, but the offer gave me the idea of making a deal with a top-trained chef I knew who wanted a deli but couldn’t afford too much rent. We came to terms, and now he has a thriving business, and I have something I enjoy that is an asset to my neighbourhood.
I own the whole building, but I realised that if I split the freehold into two leases, I could keep the residential upper floors and sell the shop to my pension fund.
It works like this: Set up a SIPP, a Self-Invested Pension Plan, and transfer your pension pot into it. Then you can borrow up to 50% of the value of your fund to buy a commercial property. So if you have, say 200k, you can buy for 300k.
Rental income from the property is then paid direct into the pension fund, which makes it tax-free and reduces the borrowing pretty rapidly. Any capital gain when you sell the property is also tax-free. If you retire and don’t want to sell the property, you can take the rent as income. At that point you would pay tax on the rental income but remain protected from tax on any further gain in the capital value of your pension asset.
There has been a lot of swaggering talk in the money press about REITS, and pooling your pension with other investors to buy multi-million pound office blocks with colossal rents, but what I love about my small simple independent scheme is that I am investing in something I understand, and it is under my control.
Of course you don’t need to own the property already and
most people will not be buying from themselves. But if you have a larger property in the city, or in a live/work neighbourhood, you might be able to get planning for a commercial outlet on the ground floor – as I did – and effectively ‘sell’ that part to your pension fund. Alternatively, if you were struggling to afford the property of your dreams, and it had some commercial potential, it is possible that you could buy it in partnership with your pension fund
The SIPP trustees will have to approve your choice and be convinced that it will be a good investment for the pension, and not just a good wheeze for you personally. For instance, if you buy a sex shop, its primary purpose must be to provide for your old age, and not wear you out with fresh delights before retirement.
The property has to be valued by a chartered surveyor – not an estate agent – and they will produce a huge document of extreme dullness. The valuation will be conservative, and that will be the price the fund will want to pay, regardless of market offers. In a bull market that can be a problem, but right now, property is good value and there is less competition out there.
If there is a tenant in your shop, you will have to honour the existing lease, and whatever rent is agreed will have to satisfy the
Pension trustees.
There are costs involved, so you need a good bank, a smart accountant, and a thrifty lawyer.
I bank with Arbuthnot Latham, a small private bank with old- fashioned principles and a certain amount of creative eccentricity, They liked my little deli, and Debbie Philpotts, their pensions advisor worked out the numbers and filled in the endless forms. They steered through the SIPP arrangements with a really terrific provider called JLT Investments in Cardiff. One person was on the case – no call centres, no ‘bear with me…’
My lawyer, Simon Morgan, is an independent guy who specialises in small deals for small investors. That’s good, because you don’t get lost in the food chain.
And if, like me, you end up selling parma ham and olive oil, you might find that there is such a thing as a free lunch.
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