Property in Pension - an investors view

January 05

The adverts have already started. With a good 15 months to go before A-day (the date on which the changes to pensions from the 2004 Finance Act will come into force), there are already some companies advertising products. Buyer beware - the revenue still have to issue some guidance on how exactly the provisions of the act will be interpreted.

The general theme is one of simplification. However, it is already clear that there are some circumstances in which people will gain under the new rules, and some in which they will lose. The good news is that there are things that can be done now, before A-day, to safeguard some aspects of your pension if it turns out you are better off than the current rules. The bad news is that, if you are one of those people, you have to act before A-day, to take advantage of some of these safeguards.

This means talking to a pensions adviser.

I am not a pensions adviser, so all I can do is give my take, the take of an investor, on what the new rules might mean. Investing is, in my experience, an individual sport. However, like most individual sports, the best results go to those who not only practice most, but use the best professionals to help them learn. In the case of pensions, this is perhaps even more true than for traditional property investment.

Under the new rules, there are going to be different calculations for how much you can invest in a pension each year (and retain the tax advantages). For the year 2006 to 2007, this will be 215k but there will still be a cap based on relevant earnings. The more annoying cap is that the total value of the fund will have a new, so-called lifetime cap, which will initially be 1.5million. If the value of your pension fund goes over that, you might end up paying tax at a marginal rate of 55 per cent to get the surplus back. I must stress that if you already have a fund approaching that limit, you need to talk to a pensions adviser NOW, well before A-day, about what can be done get the existing fund protected.

There are some new rules coming about using something called an Alternative Secured Income instead of an annuity when you reach the age when your pension starts paying you, rather than you paying it. This is the area where I see the most possible benefit to the property investor, but also the area in which I think there is most uncertainty about what the government will allow, and what they will not. Certainly, the requirement to buy annuities at the moment is, in my personal view, a huge downside of the current pensions structure, and one of the things that led me into property as an alternative back when I was in my early 20s.

The rules are also changing about what property can be held in a fund. In additional to commercial property, which can currently be held, it will become possible to hold investment residential property. Therefore, it should become possible to start investing in BTLs out of your pre-tax income. However, the rules about gearing are also due to change. At present, a fund can borrow up to 75 per cent of the value of the property it is buying (albeit only for commercial property.) Under the new rules, there will be a cap based on 50 per cent, of the value of the fund, NOT of the value of the purchase. This will, in many cases, give less scope for leverage than the current rules. So, if you are thinking of investing in commercial property in your pension fund, it may be easier in some circumstances to do so before A-day rather than after. Again, this is yet another area where a professional pensions adviser will be able to help.

In summary, it feels as if I have just written an advert for the pensions advisory profession! I do strongly recommend that you find good professional advisers, and pensions experts are an important part of that team if you are considering using your pension fund as a vehicle for buying property in a tax-efficient way. However, I should stress that not every pensions adviser will have any knowledge of property investment. As ever, you need to shop around for the best advice, but equally as ever, understanding some of the basics BEFORE you go to meet with your advisers is always worthwhile.

This is just the feature article from the January 05 newsletter. Subscribe for market comment, forthcoming events, and more.

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