TAKING A ‘SIPP’ FROM THE CHANCELLOR’S CUP OF PENSION GENEROSITY
Published 22 March 2023
Most people think of a pension as a passive savings account for their retirement. It may be invested in things offering capital growth and/or income, but until relatively recently those decisions were generally made either by the financial adviser or the pension company itself.
But over the past 20 years or so, we have seen the emergence of the self-invested pension plan, or SIPP (alongside its cousin the self-administered scheme, or SAS). This has allowed people to take back control (to coin a phrase) of their pension funds, and to be more proactive in deciding where they are invested.
SIPPs have been a very popular vehicle for investing in commercial property. Often this has been directors of companies holding the freehold to their business premises in their pension, but in more recent years we have seen more commercial property-based SIPPs diversifying into more speculative property investment.
Alongside stocks and shares, property is one of the few investment classes with the potential to offer both capital growth and an annual return.
With the growth in demand for commercial property over the past few years, this has led to a significant number of SIPPs approaching the lifetime allowance cap for pensions, effectively barring investors from putting any more into the funds. It doesn’t take too many shrewd initial investments, coupled with decent rental yields and capital growth, to take a fund perilously close to the cap, which currently stands at £1.07 million.
So Chancellor Jeremy Hunt’s announcement in the Budget that he is to abolish the lifetime cap altogether from 5th April this year will be welcome news to many commercial property investors. Even those who are at, or close to, the cap now will be able to build up their fund at the increased rate of £60,000 per year (in addition to any growth in the investments already made), opening up the opportunity to take advantage of the buoyant market, especially in industrial and warehousing buildings.
Some have cautioned against getting too carried away; shadow Chancellor Rachel Reeves has indicated that should they come to power, Labour will reverse Jeremy Hunt’s decision.
However, although they would re-impose a cap, it’s likely that it would be at a higher level than the one which has been abolished, perhaps as high as the £1.5 million level set when George Osborne first introduced the idea of a lifetime allowance back in 2006. Someone investing even the new annual maximum of £60,000 between now and the general election would be nowhere near that figure.
As ever, investing requires expert advice, and doing so in commercial property needs a deep knowledge of the market. Even with the new deregulation, compliance is still a complex matter.
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