A client wishes to purchase a plot of land, but must consider liquidity issues within his SIPP.
Emil has seen a plot of land for sale for £75,000. The land is on the outskirts of an area which he thinks could be an important site for development in the future. He would like to purchase the land as he believes it will significantly increase in value should this happen. If his circumstances allowed, he may also wish to develop the property before considering selling it on.
Emil would like to use his pension to purchase the land if possible, as he understands that if the property does increase in value, the profit is not subject to capital gains tax (CGT). Emil has a little over £75,000 in his pension.
He approaches Leanne, a financial adviser, to ask about the next steps.
Leanne agrees that purchasing the property within a SIPP could be a good option for Emil. However, she immediately identifies two issues: liquidity and diversity.
Emil’s current pension will just about cover the purchase price and associated fees, but leave very little cash left over. As Emil expects to simply hold the land in the SIPP for at least a few years, this means that no rent will be going into the plan. Emil’s SIPP therefore would not be able to pay for any ongoing fees or costs. Leanne knows that some SIPP providers will allow vacant properties but require a cash float to cover ongoing expenses.
The situation will also leave Emil’s pension very poorly diversified. As the land would use his whole pension fund, he would have nothing left over to invest elsewhere.
Leanne can see that Emil has only been contributing the minimum required under his employer’s auto-enrolment scheme, although he is earning good money. Emil admits that he used to contribute more at his previous job, but since joining his current employer and being auto-enrolled he hasn’t made any changes.
Leanne contacts Emil’s employer, and finds out that with matching employer contributions, Emil will be able to put approximately £9,000 gross a year into his pension. The employer is happy to pay the contributions into Emil’s chosen SIPP. Leanne calculates that Emil can afford to make additional personal contributions to bring the annual total to £15,000 gross.
Leanne also calculates that Emil can afford to pay a one-off contribution of £45,000. She explains that as Emil has still been a member of a pension scheme in the years since he last contributed, he can use ‘carry forward’ to make this large contribution without exceeding the annual allowance.
Emil transfers his pension into a Your Future SIPP with Curtis Banks, pays his single contribution, and liaises with his employer to set up the regular contributions. This allows him to buy the piece of land and diversify his pension with other investments, while also creating liquidity within the plan which can be used to pay any ongoing expenses. Emil could also consider using some of these funds to pay for commercial development on the land in the future.
Leanne confirms to Emil that he could apply for planning permission at any time. However, Curtis Banks would need him to sell the property before any residential development actually began. If the land was to be developed for commercial use, this could happen while the land was still held within the SIPP.