Self-Invested Personal Pensions (SIPPs) and commercial property purchase have gone hand in hand for many years, but at least one provider is imposing new limits.
We look at whether this could signal the start of more restrictive rules and whether it buying a commercial property in a SIPP might be harder in months to come.
SIPP commercial property purchase
SIPPs and indeed their self-invested cousin, the SSAS (Small Self-Administered Scheme) can invest in property. There are a number of restrictions, for example the property has almost always to be commercial in nature, it has to be acceptable to the pension provider and it must be let on a commercial basis; cheap rents to the member’s business are not allowed!
The SIPP can also borrow up to 50% of the value of the assets in the pension, including the property, to help facilitate the purchase.
Until now SIPP providers who allow commercial property purchase were generally happy for the whole fund, less money set aside to cover fees, to be used to buy the property. But now at least one SIPP provider has broken ranks and imposed more restrictive rules.
Hornbuckle Mitchell, which has over 15,000 scheme members with over £4 billion in assets, has announced they will no longer allow the entire pension fund to be invested in commercial property.
From now on they will insist that at least 10% of the assets of a SIPP are held in liquid assets.
According to Citywire, Hornbuckle Mitchell are also considering a minimum value of £250,000 for commercial property purchase.
Speaking to Citywire, David White, Managing Director of Hornbuckle Mitchell, said: “‘It’s about liquidity, in the current circumstances where we have the regulator looking very closely at illiquid assets and how schemes operate and manage to operate we feel that retaining a small amount of liquidity, which is not a huge amount of the scheme, and we are not saying it has to be cash or anything like that, just an investment that is easily realised.”
“We think it’s a sensible approach from a trustee perspective and one which IFAs should appreciate and considering themselves, and one we think he regulator will increasingly be looking at.” (Source: Citywire)
We would agree that ensuring that the SIPP has access to funds to cover fees, void period and unexpected expenditure is important, imposing minimum value of £250,000 could be restrictive, particularly in areas of the country where commercial property prices are still depressed.
We’ve asked other SIPP providers for their reaction to Hornbuckle Mitchell’s change in policy and whether it has wider implications for the SIPP market, this is what they had to say:
It is very difficult from outside Hornbuckle Mitchell to know what all the reasons are for their change in stance on commercial property. The question is best addressed to them. It does appear that they are trying to cherry-pick SIPP property purchases to some extent and reduce risks by reducing flexibility. One suspects this is part of a bigger plan at Hornbuckle Mitchell, with recent changes including new owners, personnel changes and fee increases.
We do not plan to follow Hornbuckle Mitchell’s restrictions. From all sides – adviser, client and provider – there are very important issues to consider with SIPP property purchase and risks to manage but we do not wish to prohibit viable cases through introducing rigid rules instead of considering the merits of each case.
It is important that advisers and clients think about liquidity in a SIPP and this is particularly important for investments such as property. The nature of direct property investment means that it is not divisible (unlike shares, you cannot normally sell a fraction of your total holding) and less liquid than listed securities (shares can be sold and proceeds received very quickly). There are risks that need to be considered – for example, there may be voids where there is no tenant or the tenant may get into arrears.
It is exactly such issues and risks that advisers can help clients consider; a flexible SIPP provider should be willing to provide guidance, too. The SIPP provider will also need to consider and manage the risks involved with property. This is not something new – it is something providers will have been doing all along.
Purchase and ongoing management costs with property are significant. While it is possible to transfer listed securities quickly, easily and at low cost to a new SIPP provider, this is not true with commercial property. This difficulty in moving SIPP cases means that the initial choice of provider is very important. While a case may appear simple at outset and fall within a provider’s restrictions, it is vital to remember that circumstances can change, sometimes dramatically and unpredictably. We have heard of property cases where the member is in a catch 22: they are desperate to move providers but cannot face the significant cost in doing so.
Some providers are changing their business models to focus more on standard investments rather than the bespoke. However, there will always be clients who find the case for investing in commercial property compelling. So while some businesses may move away from it, there will still be providers such as ourselves willing to offer a flexible approach to commercial property.
Martin Tilley, Director of Technical Services, Dentons
Hornbuckle may have experienced some situations where a void has resulted in no income coming into the SIPP and where a property is held, there are obviously some outgoings that would need to be covered. These might include, mortgage payments, property insurance, property rates and of course the SIPP Providers fees. Having no liquid assets can obviously cause problems. However there are ways around this if it should happen. The client might be able to contribute to provide liquidity. It may be possible to get a temporary loan to cover a period until a new tenant is obtained or the property is sold, or in fact it might be possible to sell say 5 or 10% of the property to the member, the liquid proceeds of which could again cover the period until income or lump sum in received.
We have no plans to follow their lead. We have experienced almost no problems of this nature, and if we did we would work with the IFA or client to find a solution as above.
We don’t think this is the start of a trend within the wider SIPP market, although we appreciate that Standard Life and now Hornbuckle have initiated restrictions, and these may be reactions to negative experiences but I do not see this being a whole of market reaction. There have been no changes to legislation and as far as we are aware no regulatory pressure to initiate any such procedures, however we do remain mindful that the regulator is looking at SIPP Operators processes and procedures and whilst it may appear that this could be considered a prudent process, we maintain that a well structured due diligence of the property and other processes and procedures can accommodate such situations, which as I’ve said have been very rare in our experience.
Greg Kingston, Head of Marketing & Proposition, Suffolk Life
I expect the reason to be quite simple: a SIPP with mortgaged property that finds itself without a tenant or ongoing rent payment can quickly find itself in significant debt. There’s a chance that the lender will force a sale at auction to recoup their losses, leading to the SIPP being left with little or no cash or worse: a debt. The provider’s only option to settle that debt is to pursue the investor who by now one must presume is unlikely to be accommodating no matter what their legal obligation. Maintaining a ‘float’ of realisable assets is a means of mitigating this risk, as I imagine the provider would later force a sale of these if required to meet any outstanding debts.
Investors should be more concerned with changes to the small print of their fees and terms and conditions since they started their SIPP. Advisers who’ve approached us, in particular with property business to transfer, are more frequently frustrated that there are disproportionately high exit costs to leave, resulting in an investor staying with their current provider with whom they’re dissatisfied.
There’s clear retrenchment away from risk in some parts of the SIPP market ending up with a few providers putting more restrictions in place – let’s not forget that it was only last month that Standard Life started to refuse all property business with any borrowing at all. The worrying element is that these decisions are being made because the risk wasn’t well-understood in the first place, hence the concern that some providers have significant risks in their back books of business that they’re only now becoming aware of. But just as some providers narrow their flexibility, others are very much open for business. If potential investors have any doubt as to the quality of a SIPP providers book and the risks it may pose to them, I’d suggest they consult their adviser and look elsewhere together.
Gareth James, Technical Resources Manager, AJ Bell
I wouldn’t like to speculate on the reasons behind another provider’s policy change, but the practical realities of administering commercial properties in SIPPs and SSASs mean that it makes sense to apply a sense check to proposed property purchases, an important factor being to make sure a financial buffer exists both pre- and post-purchase. This minimises the likelihood of financial problems for all parties in the future.
Unfortunately the economic uncertainties of the last few years have meant that in some cases existing tenants have been lost and new tenants have been difficult to find. The lack of a paying tenant doesn’t remove the requirement to cover ongoing property expenses, business rates being an obvious and expensive example. I’m sure that many SIPP providers, because their trustee company acts as a sole or joint legal owner of a vacant property, have had the pleasure of dealing with demands for business rates from councils on properties owned within their SIPPs.
AJ Bell doesn’t have any plans to change its current policy, which is to review all aspects of proposed property purchases on their merits and take a considered decision about whether to proceed with the purchase as proposed. In the vast majority of cases we are happy to proceed and, in the few where we need to raise potential issues, we will work with clients and their advisers to find a solution.
The removal of a permitted and prohibited investment list from A-Day meant we moved from a position where we had clear and sensible guidance on what SIPPs could invest in to one where, in parts of the market, it was possible to buy just about anything as long as tax charges wouldn’t immediately be applied on the SIPP or investment. We’ve seen a number of examples of investment collapses affecting hundreds of SIPP investors and so we’ve welcomed the intentions of the FCA in trying to impose some controls on this, albeit we don’t think they got things quite right in their consultation on capital adequacy. In light of the FCA’s attention it is inevitable that SIPP providers will need to adjust, and this means some restrictions. We hope this doesn’t just shift the most esoteric investments and less sensible property purchases to the SSAS market as it would defeat the good intentions of the FCA.
We still see commercial property purchases as being an attractive option for SIPP clients, and don’t see any reason for this to change. It is important for providers to at least apply a sniff test to commercial property proposals meaning the days of SIPP services being marketed on a basis of “if HMRC allows it, so do we” are probably in the past. This won’t have any impact on sensible property purchases, but should mean that some purchases which perhaps don’t make much sense won’t get off the ground.
Nigel Bennett, Business Development Manager, InvestAcc
Hornbuckle say that they’re introducing this because of concerns about liquidity in pension schemes, which has always been an important consideration for commercial property, or any other investment for that matter. When the pension scheme needs to pay benefits, then thought needs to be given as to whether investments will be readily available at the time. However, 10% does seem like a rather arbitrary figure to us, and it seems odd from a practical perspective that a client may not be able to pay off borrowing secured on a property until they hold a 10% buffer of liquid non-property investments within the SIPP.
We don’t have any plans to follow their lead, although when speaking to advisers we do always emphasise the importance of liquidity and planning the eventual exit strategy. There are a range of options available to SIPP members, when liquidity is a challenge, the least appetising of which is a forced sale of property at auction. Fortunately this is not a particularly common occurrence, but the liquidity issue does highlight the importance of consulting a good financial adviser before considering any potential commercial property purchase through SIPP.
On its own, this announcement isn’t particularly significant. However, it does follow fairly soon after one made in December, when another SIPP provider, Standard Life, said that they will no longer allow their SIPPs to borrow in order to purchase Commercial Property. Taking these two announcements together, from companies that have taken a significant share of the market in the past, then it does point towards additional restrictions in parts of the SIPP market. We’re interested in why these changes have happened, but we certainly have no plans to follow their lead at this point in time.
From our point of view, Commercial Property in SIPP seems to be an increasingly popular choice and we can’t see anything to threaten that on the horizon. Commercial Property purchase is a complex undertaking, and one that requires expertise from a specialist provider like us, that has the appropriate level of resource in place to deliver an excellent level of service. If advisers and their customers aren’t getting that from their existing SIPP provider then we would be delighted to help.