Self-invested personal pensions (SIPP) changes have opened up the definition on what is allowed as investments. Real Estate and “creative” investments, as of April 2006, will now be allowed with pension funds. With these changes, many are considering adding buy-to-let property to their portfolio.
To make an educated decision it’s important to know the risks and the benefits. It is wise to combine your own research with the advice of professionals like an independent financial planner, letting agent, mortgage adviser, and local real estate agents. Once you gather information, take an accurate look at your personal pension needs.
It’s the advantages of adding buy-to-let to SIPP that attracts pension planners at first. Protecting a real estate investment or any other investments, like valuable collections of art, wine, stamp, and even a baseball cards, from capital gains is sure to appeal to the masses. There is also upfront tax relief because the government will contribute a percentage of what you contribute to your pension.
It has flexibility; real estate can be let or sold, depending on the market. Long term investments, because of the average over time, typically have a better chance of a increasing in value, than short term investments do. Lenders see the potential in this area and are creating mortgage packages just for the buy-to-let loans. Historically (the last quarter of the century), the growth of capital in property has exceeded most other fields.
There are risks that should be considered before choosing to add real estate to your personal pension plans. One big risk is that till about April 2007, there are no regulations by the Financial Services Authority (FSA) for SIPP sales which may place consumers at risk. A buy-to-let investment for a personal pension plans means that the pension fund trustees own all pension investments.
Control over the real estate will be limited and may have expenses that may not be worth the benefits. Even if the buy-to-let property is sold, access to the proceeds will be restricted. There may be other ways to benefit from buy-to-let when its time to collect your pension, that will be less restrictive. This is where an educated and experience advisor will beneficial.
When a buy-to-let pension investment is added to a personal pension plan, the risks can be managed with research and proper planning. A “worse case scenario” back up plan is essential. Consider if you may want to live in the home some day, if you do, you will have to pay fair market value of the rent.
The property will he required to be managed a letting agent who is approved by SIPP provider and this cost must be considered. Though tax free, the rent collected goes directly into the pension fund and there is no immediate access to the funs from rent. For the area a rent-to-let will be purchased in, research projected needs for housing for the years you will be collecting your pension. Buy-to-let investments for pensions should be one of several income streams and a possible area of investment loss.
