SHOULD RESIDENTIAL PROPERTY BE ALLOWED WITHIN PENSION SCHEMES? · commercial properties in high streets ... Regulated Pensions Schemes rules. Any amendments would need to be consistent

SHOULD RESIDENTIALPROPERTY BE

ALLOWED WITHINPENSION SCHEMES?

A survey of interested parties inresponse to the Government’s

announcement to consult on theconversion of unused space in

commercial properties in high streetsand town centres to residential use

The Government will explore with interested parties

whether the conversion of unused space in commercial

properties in high streets and town centres to residential

use could be encouraged by amending Investment

Regulated Pensions Schemes rules. Any amendments

would need to be consistent with sound public finances

and the Government’s wider pensions strategy.

Budget 2013: Public Spending - Housing 2.18 Changes to pension investment rules to encourage the conversion of unused space in commercial properties.

“

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SHOULD RESIDENTIAL PROPERTYBE ALLOWED WITHIN PENSION SCHEMES?

Contents

Page 4 The Survey

Page 5 The Concensus View

Page 6 Voting By Financial Advisers

Page 11 Voting By SIPP and SSAS Operators

Page 15 Voting By Property Investors

Page 20 Voting By Members Of The Public

Page 25 Observations

Appendix

Page 29 The Case For Allowing Private Pension Fund Investment In Housing

3SHOULD RESIDENTIAL PROPERTY

BE ALLOWED WITHIN PENSION SCHEMES?

The Survey

The survey was conducted by SIPPclub. Relevant information was provided on a

single voting page at http://www.sippclub.com/residential-property-in-a-sipp/.

To obtain the concensus view from the widest group of ‘interested parties’, during

the one month voting period which closed on 24 May 2013, regular information

was made available to the following groups:

• Financial Advisers

• SIPP and SSAS Operators

• Property Investors

• Members of the Public

Communication was delivered by direct approach to key centres of influence in each

of the above areas, and more generally via relevant interest groups on Facebook,

Twitter and LinkedIn. Included in the circulation were online and offline ‘Meetup’

groups. It was also discussed in a variety of online financial advisory and propety

focused forums.



http://www.sippclub.com/residential-property-in-a-sipp/

The Concensus View

Based on the total vote, the conclusion is as follows:

87% of the peoplewho voted believe residential property

should be allowed within pension schemes



Voting By Financial Advisers

Based on the total vote of Financial Advisers, the conclusion is as follows:

81% of the Financial Adviserswho voted believe residential property


33% of the Financial Adviserswho voted have a SIPP

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Comments from Financial Advisers

A selection of comments from those who voted “Yes”

• I feel that residential properties give more opportunity to get capital

appreciation and better income. Why discriminate?

• All investment property should be allowed in a SIPP.

• Will get housing market a much needed boost.

• Any change in legislation which facilitates growth of the UK economy is good.

Any change in legislation which facilitates growth of the UK electorate’s

pensions through direct investment into residential property will be very

welcome!

• I believe it will boost the economy and housing market releasing much needed

liquidity to both.

• If they allow commercial property, why not allow residential property,

especially as part of a rental property portfolio.

• The property market needs a cash injection, property values would rise giving

lenders more confidence on loans at higher loan to values therefore helping

first time buyers.



• Investment property only, not personal dwelling. These are commercial

investments and make up a proportion of clients prepartion for retirement.

These should benefit from being in a tax shelter.

• A SIPP’s ability to transact in commercial property (either with or without

mortgage funding) can be a considerable advantage. Surely, there could be

similar merits to transacting in residential property. Over the longer term,

it might also have positive implications for the stock of affordable housing.

Building companies would potentially have access to a new customer base.

• The pension market place must develop to attract new investors and give

existing scheme members diversified investment opportunities. Liquidity

will undoubtedly cause problems when drawing benefits. Further reason for

ongoing advice and management.

• The wider economic stimulus it would provide plus the further diversification

of available pension investment strategy to reinvigorate the public’s attitude

toward saving for retirement.

• This will help the devlopment of a strong rental market and add more funds

into the housing market.

• With a housing shortage and a growing population, taking vast untapped

pension resources to invigorate both the housing market, all associated with it

and the economy in general can only be positive.

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• It provides an investment avenue without having to use some form of OEIC.

It is ridiculous that residential property is excluded for political reasons.

• There are a lot of properties and development opportunities which may not

be financially viable in the normal market but could become viable if SIPP

benefits were available.

• A wider choice of asset classes and the fact that current ‘commercial

proeprty’ rules restrict many potential investments into shops which have

residential above.

• Secure investment for clients. Ideal and done correctly can benefit the

economy in a number of ways.

• The most “liquid” form of real estate investment in the UK. Massive housing

shortages needed addressed and the public need better returns on their

pensions.

• It is an investment asset in the same way as any other.

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Comments from Financial Advisers

A selection of comments from those who voted “No”

• The overall economy is already too dependant on property whether

residential or commercial---let’s get the money in to the industrial base so

that the wealth becomes real!

• Demand could force up property values making it harder for first time buyers

to get onto the property ladder.

• The restrictions on access to capital from a pension plan make them

inappropriate vehicles to hold residential property.

• Will inflate an already inflated market.

• Further rise in property prices and pricing out younger people.

• I believe it will put a bubble in the housing market again.

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Voting By SIPP and SSAS Operators

Based on the total vote of SIPP and SSAS Operators, the conclusion is as follows:

67% of the SIPP and SSAS Operatorswho voted believe residential property


28% of the SIPP and SSAS Operatorswho voted have a SIPP

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Comments from SIPP and SSAS Operators


• Because it can be already but the current rules encourage people to do it

through complex vehicles which create risk and cost.

• Briefly, with a personal view, many SIPP holders who would normally only

hold funds on deposit are trying to find an investment that will produce

higher returns whilst remaining “secure”. They also feel more comfortable

with residential property rather than commercial. The government are also

keen to kick-start the economy and one of the main areas they look at when

considering the fiscal pointers to determine if UK Ltd is beginning to turn the

corner is the construction sector. Personally I think it is a no-brainer as there

are £m of pension funds on deposit waiting to be invested.

• I believe it will boost the economy and housing market releasing much needed

liquidity to both.

• 1. It will help boost the housing market and regeneration of empty spaces.

2. Rental income can be used in a more tax efficient way as pension

contributions. 3. Property is a good asset for balancing risk in a portfolio. 4.

If land/property is part of residential development which is going to be sold/

rented for profit this could be viewed as a commercial investment.



• Residential property is an asset class already established as offering investors

long term returns. I would, however, exclude a persons own residence and

any personal use of the property in question.

• It will generate much needed liquidity in the housing market, with a

beneficial effect on the economy through an increase in employment. At the

same time, it will allow many unused properties to be brought back into

use. With today’s very low interest rates, it will give an additional source of

investment return. There will be some downsides which could be controlled

by setting rules that limit exposure to residential property in some way, with

the flexibility to change those rules in future.

• Help the economy by releasing funds that banks are unable to do because of

their dreadful balance sheets.

• We operate a true SIPP offering true self-investment, adding residential

property as an investment option widens the investment scope -which is

what a SIPP should be doing. Whilst there should be restrictions in place, the

general concept mooted here is a good one.

• Giving clients more options.

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Comments from SIPP and SSAS Operators


• Most people’s biggest asset is their house and therefore to have their pension

in that is well will only cause problems at some point.

• It will create a class of toxic assets which will be impossible to transfer as

it will be used for connected party occupation thus creating substantial tax

charges for members and operators. The cost and difficulty of monitoring

the use of the property makes it a vary unattractive proposition for a SIPP

Provider.

• There is a big difference in buy to let purchases to purchasing commercial

property within your pension plan. Buy to let you will have access to your

money if you need to or decide to sell. Sipps if you sell the funds are left

within your pension scheme until retirement. If you gear a pension by

contributions the funds remain there. Yes there are tax advantages but as a

long term financial plan is this right for all individuals? Potentially at present

there are too many unknowns with the proposition.... so for now my personal

view is no.

• Residential property will be too hard to police against abuse of tax-relieved

pension savings.

• None of the reasons why residential was rejected before have gone so why is it

acceptable now when in wasn’t 7 years ago?

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Voting By Property Investors

Based on the total vote of Property Investors, the conclusion is as follows:

94% of the Property Investorswho voted believe residential property


46% of the Property Investorswho voted have a SIPP

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Comments from Property Investors


• Because we are extremely limited in SIPP’able’ assets. The most common

being conventional property, some even under a commercial license are still

being rejetced!!!

• It’s a sound bricks and motor investment just as sound as other commercial

options and may be more so.

• Allowing residential property in SIPPs will strengthen the UK property

sector and get it moving again.

• Converting office assets will be a good way resolve empty office voids. It

is a major distortion of the market if Sipps have to sell assets to realise this

alternative use as it adds disposal costs,stamp duty and reinvestment costs that

are not otherwised faced by other proprty owners.

• To stimulate the Property Sector and to increase Savings options to Pensioners

currently receiving low interest rates on their savings.

• The UK needs more housing. If structured correctly, SIPP Investment into

new buy to let housing development could help solve the housing crisis.

• It will boost the housing stock and revitalise the High Street.



• I believe it will boost pensions and at the same time boost the housing sector.

• To help ease the housing crisis and to re-energise Britian’s dying high street.

• It’s a safe secure asset class that many people would like to invest in. Why on

earth should it be excluded?

• It will stimulate the property market. It will clean up high streets which are

becomingly increasingly depressed with vacant lots everywhere. Residents

will likely shop locally, helping the local retail economy. It will provide

another investment vehicle which is no more risky than financial products.

Investing in property was mooted previously. Property has historically

delivered a better return than e.g. managed funds. The more a SIPP can grow,

while GAD rates remain low, the more will be left to the Government to tax

at 55%.

• Haven’t seen any persuasive arguments justifying differentiating between

residential and commercial property, and why only the latter qualifies for a

Sipp.

• Lack of liquidity in commercial development markets because of restrictions

and lack of lending can receive some relief.

• Because some serviced apartment schemes even with C1 /C3 planning, can

under inspection be classed as non SIPPable.

• Why not, this will allow so much more activity in the market.

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• My pension is not growing at all. It will not generate any worthwhile

income at retirement, so it’s pretty pointless ‘as is’. I could create a solid

future income through property if I could access my pension and use if for

investing in residential property, and I would also be stimulating the economy

by providing work for trades/builders AND be providing much needed

accommodation for others.

• Residential rentals are a stable , permanent part of the property scene (and

have been since the introduction of shorthold tenancies). People are choosing

to stay as long term renters due to demographics and especially social

changes.

• As the owner of a HMO, it is very much a commercial investment,providing a

service to paying customers, so why should it not be treated as any other class

of commercial asset?

• Shares in the stock market are allowed and yet I would consider these riskier

than property. Also I have heard that pension funds are allowed to invest in

property so what’s the difference?

• All BTL properties are treated as a business similar to commercial property

so what’s the difference?

• Monetising unused resources in times of austerity. What’s not to like?! There’s

no logical reason why one should be able to invest their SIPP in commercial

but not residential - opening up the latter can only serve to relieve the

pension crisis.

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Comments from Property Investors


• Rather than make this residential vs. non-residential, there needs to be a way

to restrict the use when held by a pension.

• On the whole No. There are 2 underlying factors. 1. It will cause property

prices to increase of magnitude proportions, This is not what we require. 2.

This will lead to a flood of rentals and will collapse the rental market as an

over supply forces prices down. This could create gettos and that is the last

thing we need. But if restricted to part resi/commercial mix maybe. It should

be policed carefully and proceed with caution.

• Whilst personally I might benefit if residential proeprty was allowed within

pension schemes, overall it would not help the UK economy. Instead pensions

should be used by the Government to funnel investment to where it is needed

eg high value manufacturing.

• Because of the massive distortion it will make to the UK property market.

• It will simply inflate the property bubble even faster and the eventual

correction will be far more severe.

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Voting By Members of the Public

Based on the total vote of Members of the Public, the conclusion is as follows:

91% of the Members of the Publicwho voted believe residential property


60% of the Members of the Publicwho voted have a SIPP

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Comments from Members of the Public


• It is an easy to manage asset and should produce good income and capital

growth for a pension owner.

• To allow SIPP’s to invest in a broader range of investments and to stimulate

the residential property market.

• More to the point - why not? A capital asset generating income/growth

should surely be allowed within a pension scheme.

• Alternative funding to support regeneration within disadvantaged areas and

the High Street. It would also support the construction industry and help the

UK recover from the recession.

• Why should there be any differentiation between commercial and residential

properties? Both have adavantages/disadvantages.

• Caveat that owner-occupation and connected parties cannot be allowed to

dwell within the property. In this scenario, it is simply an investment like

many others.

• Because it is a legitimate store of potential value and should be allowed for

that reason.



• It is by far the main private investment being made by a majority of the

population from either moving from larger main residences to rent these out

for an investment income, or to buy to let properties.

• There are millions of pounds held in cash in pension funds that would be

invested to boost growth in the property market and provide homes.

• Stock market performance is simply too unpredictable nowadays and other

options are needed which better allow for growth as well as an element of

capital protection. Property fits the bill.

• To increase housing availability.

• I think that when you invest, it’s really important to invest in something that

you understand and it’s fair to say that most people understand residential

property! Although I do agree that any pension investment must be made

using a structure that stops the SIPP Investor from taking any personal benefit

before retirement age so anyone thinking of a tax free holiday holiday home in

the sun can think again!!

• Residential property is almost guaranteed to increase in value. Commercial

enterprises can fail and the locale of the business may mean no growth comes

from the property as change of use caveats may exist or area may not suit new

e-style business.

• Why not? Investment is a good thing isn’t it?

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• Less volatility in rental income and property growth from residential

property would be particularly useful option for those nearing retirement and

for those in income drawdown.

• A more reliable form of income production with potential to offset inflation.

• Let’s hope the government sees sense and opens up this area for investment

as I see it as a win/win situation. It provides the opportunity to tap into large

SIPP funds to give the residential property market a much needed boost at

a time when banks don’t seem too keen on granting mortgages and I will be

able to invest my SIPP in this area instead of more risky stock market funds.

• Shortage of residential property is a well-known structural issue in the UK

property market; it makes sense to map the over-supply of empty space

(commercial) to the latent demand in the residential market.

• A guarded yes. I think properties directly owned by the SIPP holder should

be excluded. It would be too easy to cloud sound investment decisions by

“lifestyle” requirements.

• Can’t wait to invest my Sipp into residential property instead of relying on the

Stock Market and its alarming crashes and recoveries.

• Help support the economy and give a major reason for people to take more

interest in their retirement planning.

• It could help ease the housing crisis.

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Comments from Members of the Public


• Too risky though many people rely on property rental income for their

retirement.

• Stops young people from buying their own home. http://www.sippclub.

com/sipp/i-want-to-raise-money/form-for-lending-opportunity/

• It would invite tax avoidance and make adverse changes to the taxation of

pensions more likely.

• I think it would be a difficult and complicated piece of legislation to put

through Parliament. It could lead to an unintended rise in Equity release in

the future.

• You don’t want all your eggs in one basket.

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Observations

A number of key ‘interested parties’ were sent the results of the voting once the

survey was closed. Here are their observations.

Name: Adam Tavener

Title: SIPP Operator - Chairman

Company: Clifton Asset Management Plc

Website: http://www.pensionledfunding.com/

With the correct exclusions (main residence, connected party etc), there is no

reason why residential property should not be considered an appropriate asset

class for pension investment. It clearly has been considered an investment class

by millions of Britons for many years and, despite its ups and downs, has created a

substantial wealth base.

The conclusion of this survey categorically indicates this would be a welcome change

in legislation. An Financial Conduct Authority special permission category should

be created for those intermediaries who want to advise clients on this, amongst

other classes of non standard investments. This will safeguard the consumer whilst

keeping genuine choice in the marketplace.





Name: Rod Thomas FCA

Title: Property Investor / Investment Adviser - Managing Director

Company: Avantis Wealth Limited

Website: http://www.avantiswealth.com/

The current state of the pension market in the UK is little short of disastrous. The

investment focus on mainstream pension schemes is almost completely on shares

and bonds. Both of these have performed very badly over many years - in the case

of shares there is little growth over the period since 2000 - more than 13 years.

Any solution has to include a far wider spread of investments. Whilst commercial

property is currently allowable, the specialist nature and limited availability means

it will never provide more than a very small percentage of the requirement for

a new asset class within the pension investment arena. The potential inclusion of

residential property within UK pension schemes could dramatically increase the

scope of pension fund investment and, through improved performance, widen the

opportunity for investors to do better in retirement.

Historically residential property has shown less volatility and greater income

generation than a typical share portfolio. The long term nature of investment in

property is well suited to the long term nature of a pension scheme. There is a

strong case to be argued for the inclusion of both residential property located in the

UK and Internationally within a pension scheme.





Name: Kevin Whelan

Title: Independent Financial Adviser - CEO

Company: Kingswood Law IFA Limited

With the continuous roller coaster ride on the stock market this opportunity would

allow funds to be invested in an asset so revered here in the uk - property. Investors

would benefit from the security and more houses would be built. What a fantastic

win/ win.

This survey shows the vast majority of professionals and lay people agree.

Name: Nick Carlile

Title: Property Investor / Mentor - Managing Director

Company: Platinum Portfolio Builder

Website: http://www.platinumportfoliobuilder.co.uk/

Allowing residential property into SIPP’s will undoubtedly improve the UK

property market for the short and the long term. As investors, we are currently

making the best of the market at the moment with some great opportunities. By

allowing SIPP funds into the market it will create growth that most investors would

welcome.





Name: Rob Moore

Title: Property Investor / Mentor - Co-Founder Progressive Property

Company: Progressive Property

Website: http://www.robmoore.com/

In line with the vast majority of people who have voted in this SIPPclub campaign,

I believe residential property should be allowed within pension schemes because:

1. Pensions are another form of readily available finance which bridges the gap

from the reduced lending environment legacy of the credit crunch.

2. People saving for pensions often get poor returns in traditional pension

schemes; residential property offers a viable alternative they can understand.

3. Lot sizes are much smaller with residential. Reality with SIPPs or SSAS

pensions is that you can only borrow 33% LTV meaning you need £200k+ in

cash in pension just to buy a small £300k commercial property.

4. It helps to fix a national need: more rental accommodation. Pensions could

also be used in conjunction with developers to invest in more property.

Name: Mark Walker

Title: Property Investor - Director

Company: Walker Haynes Limited

Website: http://www.walkerhaynes.co.uk/

Any legislative change that allows, encourages or facilitates additional property

development through new schemes of investment in the UK is good news for our

economy.





http://www.walkerhaynes.co.uk/

Appendix

The Case For Allowing Private Pension Fund Investment In Housing

In May 2003, the British Property Federation positioned a paper entitled “The case

for allowing Private Pension Fund Investment in Housing”. As many of the issues

raised in the paper are relevant to this consultation, it’s reproduced in full below.

Top Line

• The UK needs to attract private capital into housing to help address shortages,

to meet increasing demand resulting from demographic changes and raise

standards.

• There is significant demand from private pension funds to invest in residential

property, either directly or indirectly, but current regulations on Self Invested

Personal Pension Funds (SIPPs) and Small Self Administered Schemes (SSASs)

prevent this.

• The regulations are tightly drafted to prevent pension funds investing in

members’ homes and holiday homes.

• However, they also prevent other forms of investment in residential property

by SIPPs and SSASs and hence deprive the UK of £billions of valuable

investment in quality housing.

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FPD Savills estimate that £2bn a year of investment in the private rented sector

will be needed over the next two decades to cater for expected demand (Private

Renting: A New Settlement - A commission on standards and supply, Shelter/Joseph Rowntree

Foundation, 2002).

The question, which this paper addresses, is whether this investment area that is

generally available to all investors, should continue to exclude SIPPs and SSASs.

Residential property - a new asset class:

Historically, significant private investment in rented housing was discouraged by

the fear that tenants would have security of tenure at rents which were not linked

to inflation, causing the freeholder to be left with a long-term, illiquid investment.

Following the changes introduced in the 1988 Housing Act, however, these

problems have disappeared; perceptions have changed and returns have encouraged

new investment both from the buy-to-let investors and via some institutions.

There are now institutional products available, which invest in residential property;

below are some examples:

Company ProductClose Brothers Capital Appreciation TrustAberdeen Property Investors Regent Residential PartnershipSchroders Residential Property Unit TrustING Barings Baring, Houston & Saunders Redisential Fund

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However, compared with institutional investment in residential property in other

European countries this is miniscule. The chart (next page) is based on IPD data

(with a partner organisation KTI in Finland). It shows the tremendous potential

investment that could come from institutions in the UK if the right conditions were

created and European levels were met, although admittedly not all of this would be

down to SIPPs.

The attractions and pitfalls of property for private investors:

There are fears that people should not be encouraged to invest in residential property

because they already have a substantial stake in the sector via home ownership.

SIPPs are therefore prevented for investing in any residential property.

However, individuals wanting to invest in residential property in recent times have

been able to do so via the buy-to-let market. It has encouraged heavy borrowing and

a very narrow investment strategy, focused perhaps on just one property, which is

riskier than investing in a collective scheme. Council for Mortgage Lenders figures

(press release dated 11 March 2003) show that at the end of 2002 there were an

estimated 275,000 buy to let mortgages outstanding worth £24.2 billion. Average

loan to value ratios have remained at 80%, and the average minimum rental cover

requirement (the proportion of the mortgage payment that the lender requires the

rent to cover) has remained at 130%.

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This trend holds risks for the individual investors, for their tenants, and for the

wider housing market. Data provided by the Investment Property Databank (IPD

Residential Investment Index 2002), drawn from institutionally owned portfolios

of let houses and flats valued at £765m show average costs of 37% of gross income,

significantly more than the CML minimum rental cover. Even the figures from

ARLA (Association of Residential Letting Agents), who heavily promote Buy to

Let, suggest that maintenance and repairs need not be considered when looking

at a five year investment in residential property. Their Index of Returns on Buy to

Let assumes 6%.

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These figures do not include agents’ fees and charges or any estimation of the costs

of minor repairs and maintenance. The fear must be that a large number of private

tenants will live in properties managed by amateur landlords who will have made

an inadequate allowance for the costs of repairs and maintenance.

Buy to Let investors compete with owner-occupiers to buy existing housing stock,

rather than assist in the creation of additional supply.

Most major pension fund consultants recommend that a diversified investment

portfolio should contain property and there are good reasons why residential

property should be make up a proportion of a diversified pension fund:

• Analysis of optional portfolio performance over the past twenty years clearly

demonstrates that risk adjusted returns are enhanced by an allocation to

residential property alongside commercial property.

• A critical feature of pension fund investment is its ability to provide a match

for wage inflation in order that the end value of investment is sufficient to

meet the needs in the future. Residential property investment provides a

good match for wage inflation, since the rents paid to occupy property as

a proportion of total earnings, would be expected to remain reasonably

constant. There is therefore, a closer link between the entity paying rent and

the pension investor recipient than is the case with commercial property and

corporate tenants.

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• Residential property investment has provided less volatility in performance

than commercial property. In simple terms, when a commercial property

investment suffers from a weak occupier market, its rental value may fall, and

since investor demand may fall concurrently, the impact on capital values may

be significant. Contrast this with the equivalent situation in the residential

sector, where given that occupiers have a clear choice between buying and

renting, it is more often the case that when the rental market is weak, capital

values are well supported (typically, as owner occupiers support prices and

values are moving upwards rental demand falls, and when capital values fall

rental demand increases.)

Lost investment in housing:

As well as running counter to good investment practice the current restrictions are

depriving the UK of substantial investment in housing.

The SIPP Provider Group estimates that there are currently in excess of 50,000

(figures taken from the SIPP Provider Group website) SIPP schemes and with the move

away from defined benefit to defined contribution schemes they predict that the

number of plans could increase to 500,000 by 2010 (figures supported by Personal

Pension Management Ltd). The size of the market for property funds is therefore

considerable. Assuming a very conservative 5% of the current £10bn2 in SIPPs was

invested in residential property - that would be £0.5bn of investment in private

rented housing. If these figures were projected forward on the basis of anticipated

growth, the figure would be £5bn by the end of this decade, making a sizable

contribution to the private rented sector’s investment needs.

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The current restrictions on SIPPs, however, prevent this potential investment going

into housing and can lead to other side effects. For example, the current rules also

stifle investment in particular kinds of properties, such as flats over shops, because

of their residential element. The effect of this is to deprive investment in a type of

property which is often located in town and city centres and which could provide

excellent key worker accommodation.

The British Property Federation (BPF) conducted an informal survey of Independent

Financial Adviser and Pension Trustees last year:

• 88 responses were received.

• The majority were from Independent Financial Advisors (IFAs) & pension

fund trustees, plus a small number from accountants and solicitors.

• The replies showed a strong support for a change in the law and many

provided examples where current legislation had affected investment

decisions.

• Only three replies disagreed with changing the law to allow SIPP investment

in housing.

Some feedback:

• C. Ltd estimate their total funds currently held in SIPPs to be in the region of

£300m and if restrictions were to be lifted then £30m could be attracted to

residential property investment.

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• A.J., who consider themselves a small practice, anticipate that “out of funds

under management, approximately £10-15m could be earmarked for such

residential property investments and the same again could be attracted in new

business opportunities within a 12-24 month period.”

• F.T.: “Generally speaking residential units are more suited to SIPPs & SSASs

because of their size and marketability….depending on circumstances we

would recommend that anywhere between 10% and 50% of self invested

funds should be invested in residential property.”

• I. Ltd (IFA): “I can state fairly confidently that for the majority of our existing

pension fund clients, their first choice investment would be in a residential

investment property due to the track record of this sector coupled with

the investment yield. A pension fund is an appropriate vehicle for property

investment due to the long-term nature of the investment. This is because

the unit cost of properties is generally lower and a fund might hold several

residential properties. There would be a greater security of income yield to

the fund through a multitude of diverse tenants. If investment in residential

property was permitted 20% of our clients would invest in this area.”

• B. (Chartered Accountants) say the current regulations are “unfair, illogical

and restrictive” and create unwanted barriers for investors.

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• This is supported by an example from C.M. (IFA), who were: ”…asked

recently to arrange a SSAS for a client where a Post Office was going to

be purchased for 60% of the square footage whilst 40% was a first floor

residential element. This was deemed permissible by the Pension and

Superannuation Office and demonstrates the irrational nature of not allowing

residential property investment in pension funds.”

• G. (Chartered Accountants) – “In every case where I have been advising

strategically on pension planning and upon the asset mix, over the last three

years, the one principal query is whether investment in residential is allowed.

There is significant pent up demand from pension funds, which are as a result

forced to invest either in traditional stocks and shares or in commercial

property. This has led to reluctant investment in assets providing a lower

return.”

• N.S.C., a practice advising over £1bn of funds comments, “that perhaps 20%

of such funds… could be directed into the residential sector should the ban

be lifted. It would be beneficial to the schemes and to the housing market.

The company acts as advisor to a number of housing associations and is,

“particularly aware of the need to attract private finance into the residential

sector.”

Several of the respondents held portfolios, which included residential and

commercial and provided examples where the residential part could not be

refurbished because it was uneconomic to do so under the current regulations:

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• G.F. & Co (fund size £8m) gives examples of two clients affected by the

current situation: “One particular client owns a shop which he occupies as

his business and has had four offices over his shop which he has been unable

to rent out for the past 4 years. During this time he has received planning

permission to convert these offices into a flat, which would increase income

to his car park. He is unable to utilise this planning permission due to the

restrictions limiting SIPP and SSAS investment.”

Allowing investment in housing by SIPPs, particularly via collective residential

funds, would help serve many of the Government’s current housing objectives.

1. There is a huge demand for one and two bedroom properties in urban areas.

Capital is needed to satisfy demand and the pension fund market is an obvious

provider.

2. More generally, collective funds are likely to want to invest in quality housing,

helping to raise the overall standard of stock in the private rented sector.

3. Collective fund investors would generally seek to have their investments

managed by professionals and would therefore contribute to raising

management standards in the private rented sector.

4. Altering the rules would allow SIPPs to invest in mix-use schemes and

therefore stop the current incentive to leave flats over shops empty.

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The current restrictions on SIPPs and SSASs:

The current guidelines from the Pension and Superannuation Office expressly

forbid the investment by SIPPs and SSASs in residential property. There are three

specific exemptions to this as follows:

1. Residential freehold ground rents.

2. Property that is occupied as a condition of an employee’s employment.

3. Property occupied in connection with the occupation by someone’s business

premises held as an investment by the SIPP.

These guidelines are contained in the Personal Pension Schemes (Restriction on

Discretion to Approve) (Permitted Investments) Regulations 2001 which came into

force on 6 April 2001.

In the case of SIPPS, but not SSAS’s the exclusion includes tax-exempt unauthorised

unit trusts that hold residential property. There is, however, no restriction of the

assets that can be held by companies the shares of which can be purchased, provided

that they are listed on a recognised stock exchange. Exposure to the sector can

therefore only be gained in an indirect from, which tends to be more costly to the

investor and thus to reduce overall returns.

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It is clear from the comments therein regarding what constitutes an acceptable

ground rent investment that the principal concern is that the pension fund may

purchase the home of the scheme member (or the home of a person connected

with that member), which would allow them to benefit from double capital gains

tax exemption.

Solutions

We fully agree that it would be entirely inappropriate for pension funds to purchase

the homes of their members. However, the current restrictions not only serve to

prevent this but also serve to prevent any other investment in housing, whether

through the direct purchase of a property or by way of investment through collective

funds.

Direct ownership of property:

Most trustees of pension funds take their role very seriously. A simple statement

of restriction to bar pension funds from purchasing properties owned by their

members or people connected with them would be sufficient to prevent an abuse

of this nature. Indeed, this methodology is what the existing rules rely upon and we

see no reason why the exclusion could not be drafted so that it is more accurately

aimed at the problem.

Investment in collective schemes:

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Investment in collective schemes is, arguably, a more complex issue, but one that

is even easier to solve. The principal apparent problem is that the managers of

the collective scheme will not usually have any great degree of information about

the investor base and one can argue, therefore, that properties may be acquired

which are either owned by the investors or by people connected with them. This

suggestion, however, ignores a number of key points:

1. Since the property acquired will usually be acquired for letting, it must be

vacant upon purchase and is, therefore, most unlikely to be the home of either

the investor or anyone connected with them;

2. If the residential fund was involved in equity release (i.e. where the vendor

of the property becomes a lifetime tenant), there would also seem to be no

inherent problem because the investor would have sold the property for,

presumably, the best price that they could obtain within the equity release

market and, on this occasion, it just happened to be in a fund in which they

invest; and

3. In any collective scheme, the level of investment of any particular investor

will represent only a tiny proportion of the overall fund and their return,

therefore, will only benefit to a tiny extent from what was previously their

property.

4. The existing SSAS regulations contain provisions on acquisition of investments

from scheme members or connected persons, and these could be adapted to

cover residential property as well.

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Even if these points were not thought to carry weight, it would not be a problem to

impose a requirement on trustees not to invest in collective schemes of which their

schemes’ members are tenants at the time of purchase.

Conclusion

We acknowledge the concerns about pension funds purchasing the homes of

scheme members and we therefore accept the need for regulations to prevent this.

However, as we have illustrated, the unintended consequences of the way that the

current regulations are drafted is that the sector is potentially being deprived of

significant and stable investment. Investors are instead being driven to potentially

more risky buy-to-let investments, or not into housing at all.

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XYZ2324.SCS (05/13)

SHOULD RESIDENTIAL PROPERTY BE ALLOWED WITHIN PENSION SCHEMES? · commercial properties in high streets ... Regulated Pensions Schemes rules. Any amendments would need to be consistent

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