Property Investments: Grow Your Pension

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BUILD YOUR PENSION

Investing Your Pension in Commercial Property

You may already understand how pensions work, including the benefits you will receive once you retire, but did you know that you can use your pension pot to buy commercial property in the UK? Just as your pension can be invested in stocks and shares, it can also be invested in the bricks and mortar of commercial properties such as warehouses, retail units, and offices. However, you cannot invest your pension in residential property. This type of investment can be highly tax-efficient, especially for business owners. Ben Hewitt, Chartered Financial Planner at Alan Boswell Financial Planners, explains how it works.

Benefits to you and your Business

You may already understand how pensions work, including the benefits you will receive once you retire, but did you know that you can use your pension pot to buy commercial property in the UK?

Just as your pension can be invested in stocks and shares, it can also be invested in the bricks and mortar of commercial properties such as warehouses, retail units, and offices. However, you cannot invest your pension in residential property. This type of investment can be highly tax-efficient, especially for business owners.

Investing in commercial property can be beneficial if you’re a business owner, as you’ll end up with suitable premises for your company, as well as regular rental payments into your pension. Plus, it’s highly tax-efficient.

Example – You’re the owner of a business that’s outgrown its current premises. You’ve spotted the perfect warehouse for sale at £0.5m, and you have a pension pot of the same value. Once your pension trustee has confirmed the building is a sensible investment, the surveys and paperwork can commence and your pension funds can be used to buy that warehouse. Once it’s all completed, the building will be owned by your pension.

Your business will enter into a commercial lease with your pension, with rental fees based on standard market rates and negotiated with your pension trustee. Each rental payment you make goes directly into your pension, not to a landlord. This way, you’ve secured new premises for your business while your pension gains a tangible investment.

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As both the business owner and pension holder, you know the pension trustees and you know how much they want for rent. Your pension is growing by the rental amount each month, and you know that at retirement you can sell the property. Plus, because it’s your business that’s occupying the property, you don’t have to worry about what any tenants are doing in there.

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HOW

If Your Pension Will Not Cover The Purchase Price

Add extra money into your pension before purchase

This is where you can maximize the benefits of the pension system.

If you’re in the 40% tax bracket and need an additional £10,000 to purchase the property, you only need to contribute £6,000 to your pension. The government will top up your payment with tax relief, making up the difference.

Take out a mortgage to cover the extra cost

If you have £500,000 in your pension and the property your company needs costs £600,000, you could consider arranging a mortgage for £100,000. However, it’s important to note that pension rules limit the total mortgage to 50% of pension assets.

Buy the property with business partners /family

You can combine the pension pots of multiple individuals to purchase the property, with ownership proportionate to each person’s capital contribution. This is achievable through a group SIPP or SSAS. However, be aware that this approach will increase setup and administration costs, which can amount to several thousand pounds.

If your pension funds are split across multiple schemes...

You can still invest, but it may be advisable to consolidate your pensions first.

If you purchase a commercial property using two separate pensions, the building would have two owners. This would double your costs for services such as conveyancing and require two rental agreements. Therefore, it makes sense to combine everything into one pot before buying the property.

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You can go into business with a partner and use your two pensions to buy half of the property each, but it does add to the cost.

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If you sell your property, the tax-free rental payments and any profit from the sale—free from capital gains tax—will boost your pension pot. You can then reinvest or, if you're over 55, start drawing down your pension.

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If you want to move or sell up...

You’ll need to adhere to the terms and conditions of your commercial lease, such as the minimum notice period. After fulfilling these obligations, you have two options:

Rent out the property to another business
Sell the property

Every Investment comes with a risk

Property values can fluctuate, and you may not recover the original amount invested.

If your property incurs a loss when sold, your pension will also experience a loss. Under current legislation, you cannot access your pension funds until you are 55, meaning any profits from the sale will be locked away until retirement. Additionally, converting property investments into cash can be a slow process, affecting how quickly you can access the funds. The responsibilities of property ownership, such as maintenance costs, should also be considered, especially if you are renting the building to another business and are not present to oversee its daily use.

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