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The Sipp Myth Has Ended

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05/12/2005

Residential property will not be allowed in SIPPS!!!!!

The rule changes were expected to lead to a boom in self invested personal pension schemes (Sipps), pensions with wide investment freedoms.

Residential property and exotic assets, such as fine wines, classic cars and even stamp collections were among the assets which were expected to be allowed to be held in pensions after April 6 and qualifying for income tax relief up between 22 per cent and 40 per cent.

However, in a technical note accompanying today’s pre-Budget report, the government announced it would remove the tax advantages for residential property and other assets, such as fine wines, art and antiques for schemes which are self directed. The move will remove any tax advantages of holding residential property directly or other exotic assets within a Sipp.

Chancellor closes door on property in pensions

That kind of renders this whole thread redundant. There will be no residential property allowed in SIPPS

This thread is now closed and continues here

Below follows the original post which is now not really relevant any more to properties in SIPPS, but still contains useful information about SIPPs

------------------------------------------------------------------------------------------------------------------------

People keep posting and asking about SIPPs. We have chewed this topic over months ago at HPC, but as always, Joe Public only wakes up to the story belatedly and then rushes to jump on a bandwagon.

So very briefly, to debunk SIPPs once and for all, a very brief (and thus not accurate in all details summary):

1. A SIPP is a self-invested personal pension. These have existed for a long time. They are nothing other than personal pensions, which have also been around for a long time, in which the beneficiary can make his/her own investment decisions, rather than putting the money in (often poorly performing and high charging) unit trusts. There is nothing new about SIPPs. The only thing that is new from April 2006, is that most restrictions about the classes of assets in which SIPPs can invest will be lifted. Right now, SIPPs can only invest in shares, bonds and commercial property. From April 2006, they will be allowed to invest in just about anything, including residential property.

2. A SIPP fund, like any other pension fund, is a fund separate from the personal assets of a person. The SIPP funds are legally owned by a trustee for the benefit of the person whose pension the SIPP will eventually provide. The SIPP fund is therefore not legally owned by the beneficiary; this is very important, as we will see in a moment.

3. There has always been tax relief on contributions to personal pensions. As SIPPs are personal pensions, contributions to the SIPP fund also enjoy tax relief. There is nothing outrageous about this. Personal pensions are taxed at the time the pension is paid out, as the pension drawn from the SIPP fund will be taxed as income. What will change from April 2006 is that the annual contribution limits have been greatly increased (to £215k) with an additional lifetime cap. This gives higher flexibility, because now someone can make higher contributions, for example during years when their earnings are high. This may, for example, benefit professional women, who might make very high contributions during the years before they give up a career to have children.

4. Tax relief is given on pension contributions at the marginal rate of tax. In other words you need to be a higher rate tax payer in order to get 40% tax relief on contributions to a SIPP. This is completely ignored in the current hype, as there seems to be a general assumption that everybody will get a 40% "discount" when "buying assets thorug a SIPP". This is not correct. If you are not a higher rate tax payer, then you ain't get 40% tax relief. Period. This already rules out the majority of the population from the "40% discount".

5. Tax relief is, by definition, given only up to the amount of income tax liability in any given tax year. In other words, you can only get as much tax relief as your income tax bill is in any tax year. (subject to an absolute annual limit of £215k) This prevents all but the highest earners from "buying a property through a SIPP". Uninformed writers talk about people "putting £100,000 in a SIPP and getting £40,000 back". You need to have a tax bill of £40,000 in that tax year in the first place to put £100,000 in a SIPP. We are now looking at a very tiny fraction of the population who will be able to make such contributions to a SIPP.

6. From April 2006, the borrowing rules for SIPPs will also change, and it will be more difficult for a SIPP to borrow money. The SIPP will only be able to borrow 50% of its assets (prior to the property purchase). At current house prices, even the cheapest typical investment properties (2 bed flats) start at £150,000. You would need £100,000 already in your pension to make such a purchase. Even if you have £100,000 in personal fortune, you would most likely not be able to transfer this money into a SIPP, unless you have a £40,000 tax bill (see above). Except for a tiny number of wealthy and very high earning people, the whole idea just does not work.

7. Assuming someone has enough funds in their pension to buy a property, the idea of transferring existing property held outside the SIPP into the SIPP is still fraught with difficulties. As the SIPP funds are legally owned by a trustee, the trustee must buy the property. This will trigger stamp duty, as well as capital gains tax (if there was a gain) in the case of a BTL property. If the property is one's own residence, one must pay a market rent to the SIPP trustee.

The long and the short of this all is: unless you are a very high earner, it is virtually impossible to put enough money into a SIPP in order to buy residential property

Now, in light of this, let's look again at the claims made in the press:

"property can be bought at a 40% discount when bought through a SIPP" - Nonsense. The SIPP fund will pay the normal price for a property. It is when the contributions to the SIPP were made that a 40% tax relief was given, but one can only get tax relief up to one's tax bill, and 40% tax relief is only given to higher rate tax payers.

"existing property can be transferred to a SIPP" - Nonsense. Nothing can be "transferred" to a SIPP. If one wishes to "transfer" an asset to a SIPP, the SIPP trustee must buy it from the beneficiary at the market price. In order to do so, the money to pay for the asset must already be in the SIPP, which can only have happened through contributions. And these, as we have seen, are limited by one's tax bill.

So why the hype about SIPPs? Why are the falsehoods peddled by the financial advisers and property developers? Surely, when it comes to actually carrying out the transaction, most people will realise that they cannot do it within the rules. The reason there is such a hype now, is that SIPPs are being used by shady characters to sell their products (such as BTL flats, wine etc.) now on the back of expectation that "next year, when SIPPs come in, prices will go through the roof". Indeed, fine wine prices have already risen by 20% in last three months, even though SIPPs are not even coming in until April next year. Once people start realising next year, that only a small minority will actually be able to really benefit from the SIPP rules, the hype will evaporate, and wine prices will collpase again, and this will also be the final straw for the BTL market.

I hope this now clears things up once and for all.

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"property can be bought at a 40% discount when bought through a SIPP" - Nonsense. The SIPP fund will pay the normal price for a property. It is when the contributions to the SIPP were made that a 40% tax relief was given, but one can only get tax relief up to one's tax bill, and 40% tax relief is only given to higher rate tax payers.

Halleluja (sp?) This is the most mis-understood bit about the whole thing. (see my posts on the other threads)

Just 1 point though - I thought there was to be an annual cap (raised to 215k) AS WELL as a lifetime limit (1.5million)?

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One question.

Could people use their SIPP, collectively, i.e. buy as shares in a property investment.

In other words, will pension companies offer to invest part of someone's pension in

a share of say, a large commercial property. as they do with index linked stock and shares.

I’ve read the debate about buying individually, and it doesn’t add up, but will they

be able to club together under the changed rules?

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Just 1 point though - I thought there was to be an annual cap (raised to 215k) AS WELL as a lifetime limit (1.5million)?

You are correct. I omitted this point, because it is virtually irrelevant, as it would only affect earners above £215k p.a. But I have now edited the main post for correctness sake.

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The only thing I might add is that the value of most SIPPs is greater (significantly) than the value of most personal pensions - from the stats I have seen, the value of most SIPPs is over £100k, with a decent %age being over £500k - of course even at that level, the SIPP beneficiary would be putting a sizeable chunk of their fund into a residential property if they chose to buy even a cheap BTL which wouldn't be a particularly good idea.

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One question.

Could people use their SIPP, collectively, i.e. buy as shares in a property investment.

In other words, will pension companies offer to invest part of someone's pension in

a share of say, a large commercial property. as they do with index linked stock and shares.

I’ve read the debate about buying individually, and it doesn’t add up, but will they

be able to club together under the changed rules?

As a SIPP can hold shares in an investment vehicle, there is nothing to stop property investment trusts oder unit trusts to be formed, investing in residential property, with SIPPs holding shares in these. They might indeed be marketed, but this will be a far cry from "buying BTL property in a SIPP".

You can already do this today with commercial property. I hold a large position in Close High Income Properties (Symbol: CHI) in my SIPP. Nice 7.75% yield tax free within the SIPP.

The only thing I might add is that the value of most SIPPs is greater (significantly) than the value of most personal pensions - from the stats I have seen, the value of most SIPPs is over £100k, with a decent %age being over £500k - of course even at that level, the SIPP beneficiary would be putting a sizeable chunk of their fund into a residential property if they chose to buy even a cheap BTL which wouldn't be a particularly good idea.

What needs to be remembered is that people with £500k+ SIPPS will be (mostly) savy investors who are unlikely to jump on the latest bandwagon.

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The SIPP fund will pay the normal price for a property. It is when the contributions to the SIPP were made that a 40% tax relief was given,... [bubble Pricker]

True, but the tax relief is an incentive for people to put funds into a SIPP that they otherwise wouldn't do in order to purchase a property.

If one wishes to "transfer" an asset to a SIPP, the SIPP trustee must buy it from the beneficiary at the market price. [bubble Pricker]

Would it be legal to sell a property, such as a holiday home, to the SIPP trustee at below market price? Could one sell a share of a property to the SIPP trustee while retaining ownership of the remainder?

I hope this now clears things up once and for all. [bubble Pricker]

Alas, I suspect it will not.

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Thank you Bubble Pricker, that's a nice summary.

Except for a tiny number of wealthy and very high earning people, the whole idea just does not work

By this I assume you mean that only a tiny number of people could make use of it during this coming tax year (which in turn implies a negligible impact on the housing market as a whole). If instead I spend the next 15 years investing as much as I can into (say) a share SIPP, perhaps when the next HPC comes along I could transfer into property. Correct? If I can't transfer between assets / asset classes within the SIPPS wrapper it's a bit useless to me.

Not that I'm a property whore - just whatever makes the most investment sense at the time.

Edited by Nijo

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Would it be legal to sell a property, such as a holiday home, to the SIPP trustee at below market price?

That would be a disguised contribution and would be illegal.

Could one sell a share of a property to the SIPP trustee while retaining ownership of the remainder?

I think that would theoretically be possible, but whether the SIPP trustee would do it is another matter. Also, you would be unlikely to be able to borrow against a share of a property

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As a SIPP can hold shares in an investment vehicle, there is nothing to stop property investment trusts oder unit trusts to be formed, investing in residential property, with SIPPs holding shares in these. They might indeed be marketed, but this will be a far cry from "buying BTL property in a SIPP".

You can already do this today with commercial property. I hold a large position in Close High Income Properties (Symbol: CHI) in my SIPP. Nice 7.75% yield tax free within the SIPP.

Thanks for the reply.

So... It would be safe to say when the Government introduce SIPP the spin

and propergander will state it’s been a success, that people are using their

pensions to invest in property?

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Thank you Bubble Pricker, that's a nice summary.

By this I assume you mean that only a tiny number of people could make use of it during this coming tax year (which in turn implies a negligible impact on the housing market as a whole). If instead I spend the next 15 years investing as much as I can into (say) a share SIPP, perhaps when the next HPC comes along I could transfer into property. Correct? If I can't transfer between assets within the SIPPS wrapper it's a bit useless to me.

You can transfer assets within your SIPP as you please. That's the whole point of a SIPP. You are correct that I mean only a tiny number of people can take advantage of SIPPs at once next tax year.

What you suggest is possible and and an entirely reasonable strategy. Indeed you would not even need a SIPP right now, which may be too costly for an initially small fund. You could start a low cost personal pension plan with, say, Alliance Trust, and contribute as much as you can over the next years until you have built a fund that is big enough to warrant switching to a SIPP, and eventually shift into residential property if desired at the time.

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What needs to be remembered is that people with £500k+ SIPPS will be (mostly) savy investors who are unlikely to jump on the latest bandwagon.

exactly - your pension fund should NOT be gambling money - your pension fund is the thing that is going to keep you in food until the end of your life - as such it is probably advisable to spread it across multiple asset classes, one of which may be residential property - of course there is little to stop u putting it all in one asset class but it is a high risk strategy

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Yup, excellent post BP. Make sure this stays pinned until Apr 06 (I dare say lots of people will come here until then wanting more info on SIPPS!).

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I don't want to suggest that what you've said needs the say-so of the mainstream press but they are beginning to cotton on - there was an article in the Independent today saying that, erm, actually sipps isn't going to be that big a deal. Would post the link for the start of the article on their website but am being der-brained and can't find it. It's in the main section of the newspaper, if anyone has that.

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'Sam Dunn: Think before you succumb to Sipp fever' [2nd. Oct. 2005]:

http://money.independent.co.uk/personal_fi...ticle316483.ece

Even with the tax relief available, you'll first need to save a huge sum to be able to put a buy-to-let or holiday home into a pension pot -- at least £250,000, by many estimates -- as well as having money left over for other investments.

There's also the danger of wholly investing your Sipp pension fund in a buy-to-let property only to find, years later, that a falling market means your nest egg is shrinking and that, with no buyers, you can't get access to your cash to buy an annuity or income for the rest of your life.

'Would you hang your retirement cash on the wall?' [25th. Sept. 2005]:

http://money.independent.co.uk/personal_fi...ticle314871.ece

At the moment, investments are limited according to your age, salary and pension type. From next April, though, you will be able to contribute huge sums annually -- up to £215,000 in the 2006-07 tax year.

But, rather than just invest in funds, a Sipp will let you borrow up to half the value of your pension pot to buy property, including a buy-to-let or even your own home.

[...snip...]

Say you wanted to go into buy-to-let: to spread your investment risk, you would need a sizeable fund to be able to buy a property at the same time as keeping

money spare to invest in other assets.

If property markets fell, the house could become hard to sell, reducing the value of your pension too.

Meanwhile, placing a foreign holiday home in a Sipp could lead local tax authorities to impose high charges on rent and capital gains - wiping out any earlier

tax relief benefits.

[...snip...]

The general rule is that direct investment in property will only be suitable for a small number of investors -- usually those with at least £500,000 in their pension, says Mr McPhail.

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Excellent post Bubble Pricker.

However, as I've posted elsewhere, I think there is justifiable concern to be be had about the 'spin' opportunity that SIPPS and property provide for the VI. If anything, the need for you to post such an explanation to 'debunk' the SIPPS 'myth' demonstrates this very clearly. If so many of us on HPC are being taken in by the spin, propaganda, lies, half-truths that are doing the rounds what is it like out there with the general public in this regard? Being 'taken in' is perhaps putting it too strongly but the spin is at least making us feel uncertain, making us feel troubled about the issue. Occasionally, when I have suggested that we, or some of us, could be a bit more active in 'spreading the word' and so on, or have supported others on here in saying 'we could do more' there have, of course, been those who say it is pointless to do anything more. Whilst I agree there is nothing we can do about the underlying economic fundamentals I think it is possible to target the spin and (try) to debunk it and generate alternative discourses about house prices. Personally, in my opinion, I would see Bubble Prickers posting at the top of this thread as a good example of this.

It seems to me that the VI's acknowledge the power of spin and do their utmost to utilise it. Afterall, isn't it spin that plays a large part in taking peoples behaviour far beyond and against the actual economic fundamentals and logic of a situation? To what extent do the true economic facts of a situation versus the spin of a situation turn people into sheeple? Surely this is a hugely important aspect of the dynamics that needs to be understood about the situation in the house price boom and bust cycle?

I think we could usefully focus some of our discussion on the dynamics of spin and how the spin could be effectively challenged and debunked as well as the constant analysing of the actual economics of our present situation in regard to the housing market. Obviously it would be fair comment to say that these two things are not quite as separate as suggested by my statements here and that much of the discussion on HPC is constantly debunking the myths. I will continue writing to newspaprers, MPs, using leaflets and so on. I respect that others here on HPC think that this is pointless activity. Please remember that we are fundamentally on the same side here before you shoot me down in flames.

To swing back to the SIPPS issue - whilst the arguments in terms of the economics and logic of the situation are very powerful in arguing that SIPPS should have minimal impact on holding up house prices (or creating a further period of boom) we are, in my opinion, still left with the danger that the spin about SIPPS could create a situation where money will pour into SIPPS/property despite it being economically irrational/nonsense/daft/etc. This spin may also spill over into people thinking they need to buy before SIPPS push prices beyond their reach forever. For these reasons I think it is worth trying to debunk or at least unsettle the spin of the VI's. Why should the VI's have a monoply on the spin and discourse about house prices?

Edited by Alfie Moon

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This spin may also spill over into people thinking they need to buy before SIPPS push prices beyond their reach forever. For these reasons I think it is worth trying to debunk or at least unsettle the spin of the VI's. Why should the VI's have a monoply on the spin and discourse about house prices?

This is an issue I have touched on in my post, and I agree it is very important. No doubt, gullible BTL investors will now be taken in by sales patter such as "buy now, as prices will go through the roof when SIPPs come in next year" or "buy now and you will be able to transfer the property into a SIPP later and get 40% back", only to see that neither predicition will come true.

I am actually not too unhappy with the press coverage so far, as many papers have already picked up two main tunes: 1. SIPPs are only for the wealthy and 2. There is danger of mis-selling.

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I am actually not too unhappy with the press coverage so far, as many papers have already picked up two main tunes: 1. SIPPs are only for the wealthy and 2. There is danger of mis-selling.

Let them mis-sell. Anyone who doesn't do their own independent research and takes the advice of a financial advisor without running it by anyone else deserves all they get.

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exactly - your pension fund should NOT be gambling money - your pension fund is the thing that is going to keep you in food until the end of your life - as such it is probably advisable to spread it across multiple asset classes, one of which may be residential property - of course there is little to stop u putting it all in one asset class but it is a high risk strategy

This is the nub of the whole issue, as far as I'm concerned. On average, someone with a substantial value in a SIPP - say, £250k - £500k - will already have a similarly sized interest in the residential market by the ownership of a private house. Why would someone who has already about, very roughly, one half of their total wealth in one asset class (indeed, in one asset!), want to pile more money into that same class? Who could possibly recommend such a thing? In fact, I think that anyone who has the savvy to have already built up this sort of wealth is unlikely to be talked into such folly. It just won't happen on any noticeable scale. Sensible people know from experience that you don't put all your eggs in one basket - as you so rightly say, a pension fund is not for gambling, it should be quite boringly safe.

p

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We know from BP’s excellent post at the top of this thread that there isn't really enough time for most people to charge up their SIPPS enough to have any significant impact in preventing the ‘crash’ – the evaporation of the bubble has already started - but we do know from pre-1990 pricing levels that tax advantages *do* lift house prices significantly above what might otherwise be considered the equilibrium point, so the scope for SIPPS (apart from the sentiment argument) is that they could lift the exit p/e for the deflated bubble and reduce the size of the crash. The post bubble (exit) p/e already seems to be above that initially expected from historic comparisons (low IR affordability argument) and SIPPs may push it up a bit more.

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a pension fund is not for gambling, it should be quite boringly safe.

It could arguably be sensible to have your pension in more risky asset classes until you are in your 40s say. But after this age you should divsersify or move into lower-risk funds for obvious reasons.

The irony is that those under this age are very unlikely indeed to have a large enough pension pot large enough to buy a property. The only ones likely to have that kind of amount are those in their 50s - 60s, exactly the kind of people who should not be taking a gamble.

frugalista

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