Pension A Day - Residential Property

Big_Butts

Hi

I currently have a company pension with Scottish Widow, that is split over two funds (Newton & Shroeder).

The current value of the pension fund is around £88K and about £275 goes in a month.

By April 2006 I hope (with current return rates) to have around £100K.

With the proposed changes to pension legislation I believe it will be possible to buy residential property ie My Home, and pay a rent into my pension fund every month.

My house is currenly valued at around £55K with an outstanding mortgage of around £27K (although this of course will be less by April 2006) with about 7 years left to run

Questions

1) Is what I'm thinking of doing actually possible ?
2) Do people think it is a wise thing to do ?
3) Does anybody know what sort of RENT I would have to pay into my pension

Any advice / ideas will be much appreciated.

DavidLaGuardia

Big_Butts wrote:

Hi
1) Is what I'm thinking of doing actually possible ?

I had an interesting talk with an "expert" (someone who is a boffin-techie for one of the major pension companies) and the answer seems to be yes. There seems to be many things that will be more attractive under the new scheme as the inland revenue's aim is to encourge more investment to become under their control and one day be certain of being taxed

Big_Butts wrote:

2) Do people think it is a wise thing to do ?
Any advice / ideas will be much appreciated.

I don't know what the situation would be if you couldn't pay the rent all of a sudden. There might be a risk of homelessness here.
As far as I know it is going to have to purchase you an annuity by 75. However (I didn't ask the question about this) but there is a thing called a familly SIPP and if it's under that an annuity may be avoidable (please someone check this)
There are going to be adminstrative costs that you would need to analyse and decide whether it was worth it or not
Additionally you would not get tax relief on the rent going into any fund but would be taxed on it when you took benefits in the future and this could add up to a significant amount of future tax you have imposed on yourself (or family). If it was a commercial propery where the rent was offset against income it wouldn't matter, but it does with your own residence.

Big_Butts wrote:

3) Does anybody know what sort of RENT I would have to pay into my pension

It has to be a true market value rent so if similar properties go for, say £400 to £500 pcm in your area,m £400 would be the best you could get away with.

Is your butt really big ?

isasmurf

Putting your own home into a pension post A-day is not the best thing to day for all but a select few IMO.
As has been mention on other threads, firstly you need to have 50% of the value of the property in your pension fund - and really you should have more - do you really want to invest in your entire pension in your home? Sounds far too risky to me.

Secondly, to continue to live there you either pay the commercial rental value, or if you choose not to do that then you will be taxed at 40-55% of the commercial rental value. So you've bought your proerty (and given it your pension) but you still have to pay to live in your own home? Doesn't sound like a good deal to me.

Thirdly, although you get tax relief on the value of the property you lose the principle private residence relief on CGT. So when you come to sell the house you will be charged on any gain you make, which could be a hefty amount and wipe out any advantage you get from tax relief.

It is speculated that HMRC are putting up special rules to claim IHT on a property held in a SIPP if the SIPP holder dies. So this would be another disadvantage.

Putting all this together, it doesn't seem very wise to do this, particuarly if it's going to use up all your pension fund. What are you going to do if the property market crashes just when you are going to annuitise?

DavidLaGuardia

isasmurf wrote:

Thirdly, although you get tax relief on the value of the property you lose the principle private residence relief on CGT. So when you come to sell the house you will be charged on any gain you make, which could be a hefty amount and wipe out any advantage you get from tax relief.

Hi good points, but this one is not relevant as the SIPP itself would be CGT free

Nick_C_4

Originally Posted by isasmurf
As has been mention on other threads, firstly you need to have 50% of the value of the property in your pension fund

I don't think that's right - your pension can only borrow 50% of what it's putting into the purchase itself. I.e. if it puts £100K in, it can borrow another £50K to buy a £150K property. That means the fund needs to have 66% of the value of the property.

Originally posted by DavidLaGuardia
Additionally you would not get tax relief on the rent going into any fund but would be taxed on it when you took benefits in the future and this could add up to a significant amount of future tax you have imposed on yourself (or family).

This is only true in the same way that you're taxed on the proceeds of all pension funds. The rent you pay to your pension fund will presumably be used to pay the mortgage on the property - if any is left over, I guess the pension fund can invest it any way it likes. When you take the pension, you get to take 25% tax-free, the rest has to buy an annuity, and you get taxed on the income from that. As far as I know, that's the only way you end up paying tax on the rent you pay.

I also agree with DavidLaGuardia that the pension fund doesn't have to pay CGT when it sells the house. However, perhaps isasmurf was saying that when you sell the house to your pension, you are liable for CGT? But that doesn't sound right either....

Nick.

Stabilo

Big_Butts would only need to invest about one third (£37K plus 50%) of his pension fund to buy his home. I don't think this it too risky when you consider house price movements over the last 40 years.

I read that the '50%' has to be repaid within 5 years. Therefore suggest rent of say £350 / month as this would repay the 50% over 5 years and represent a 'commercial' 7.6% return on the £55K property value. The balance of the pension fund should service the interest repayments on the '50%'.

Q's - can employers contribute to SIPP's in the same way as a standard personal pension i.e. tax deductible?

Does employee obtain tax relief (on monthly contributions) for investment in SIPP's?

Stabilo

isasmurf

Nick_C wrote:

However, perhaps isasmurf was saying that when you sell the house to your pension, you are liable for CGT? But that doesn't sound right either....

No. DLG was right. It was late and I was drunk. :beer:
Note to self... don't talk about complex things when merry.

What about the issue of selling your house to the pension fund? Does the stamp duty and other costs of selling/buying a house wipe out a lot of the benefit?