Property Partner

barginfinder wrote: »

my primary reason for investing in this is to use the income to help fund a SIPP to boost my retirement fund. I thought by reinvesting the income but in a fund based SIPP I would benefit from the tax relief as well diversify my investments.

So you are investing outside a SIPP and then using the proceeds of that investing to fund a SIPP? Why not just put the money into a SIPP in the first place and invest in diversified assets inside the SIPP?

For example, lets say your marginal rate of tax is 40% so you get 40% tax relief on any pension contributions; to work with round numbers, every £10 gross investment in the pension pot only costs you £6 net contribution, or looking at it the other way around every £10 net investment gets you £16.66666667 gross in a pension pot.

So let's say you have the choice of If you go route a), then you put £1000 into a pension on day one and it turns into £1666.6666. Then you get 4% growth on the £1666.7333 for the first year, turning it into £1733.3333. Then you get 4% growth on the £1733.3333 for the second year, turning it into £1802.6666

Alternatively you could go route b), and invest the £1000 outside the pension so that after the first year it turns into £1040. Then at the end of that year you can put put that £1040 into a pension. As you get £16.6666667 inside the pension for every £10 contributed, and you're contributing an extra £40 over and above contributing the £1000 in the other example, you will get an extra £66.6666 on your pension pot in addition to the £1666.6667 you would have got for contributing £1000. So in total you would have £1733.3333 in the pension at the end of year one. Unsurprisingly that's the exact same as what you'd have got if you had just gone route a). So with the position at the end of year one being the same under route b) as it was with route a), it's not surprising that by the end of year two the £1733.3333 has turned into £1802.6666 just like it did in route a).

So you are thinking that by investing 20% of your wealth in this specialist fund outside a SIPP you will generate more money to invest into your SIPP and benefit from tax relief which boosts your investment. But growing the money before putting it into the SIPP doesn't actually get you any more 'ending' money than if you had just put it into the SIPP earlier and grew it all inside the SIPP at the same rate (i.e. not bothered to grow it in this Property Partner product first).

SIPPs have tens of thousands of investment options which can be held in any proportion you like, creating near infinite blends of risk and returns with plenty of diversification available, so it's very unlikely you couldn't find something inside a SIPP that would generate the same total % returns over the same time period.

The drawback to the way you are doing it is that in my worked example above, ultimately you end up contributing more money to the SIPP if you grow the money a bit first, instead of just putting it in the SIPP at the start. For example instead of making a gross £1667 contribution (£1000 net) you are doing a gross £1733 contribution (£1040 net). And there are legal and practical limits on the total amount you can put in each year to benefit from the full 40% tax relief.

What I'm getting at there is that obviously you can only contribute the extra £66.66 gross amount into your pension and get 40% tax relief on it if
(i) you actually have enough salary /business earnings that you were paying 40% tax on, and
(ii) you are not over the £40k annual pension contribution allowance between you and your employer.

So, a lot of people if they already had capacity to contribute to a SIPP and get good tax relief on it right now, would just go ahead and do that, rather than doing what you are doing which is first buying an 'eggs in one basket' specialist investment product outside a tax wrapper, grow their money through that product, and use the income from that product to fund the investments into the SIPP.