“However, we believe the FCA needs to refine its view. Lumping all non-standard assets together misses details that are very significant to the health and value of a Sipp business. With direct investment in property there is a real asset, there is typically an income, and there is no real concentration of risk as members as a whole are invested in any different, unrelated properties.”
Indeed, some argue that certain risks are even lower for commercial property. “UK commercial property, although less liquid, is less susceptible to fraud than other investment sectors,” says Guy Young, director at NSS Trustees Limited. “It is harder to steal a building.”
If the regulator does persist in its views on commercial property, there is a real possibility providers will no longer offer it and/or fees will go up. Prices for holding property are outlined in Table 2. Although many represent good value, it is not a cheap option; raising charges could make property a less realistic option for many investors.
Residential consequences
Pricing and availability for residential Sipps is not even at the speculative stages yet. The announcement that residential property in Sipps was back on the radar for the government was unexpected, but it is not the first time it has been considered.
Prior to 2006, the government had contemplated its inclusion. But plans were shelved due to a number of concerns, including potential price distortions from huge flows of pension funds into house purchases and the misuse of the legislation to buy second homes abroad. And the market had already started to move in anticipation of the change – many bought properties hoping to gain tax advantages of putting them into a Sipp and some housing developments were allegedly targeted specifically at the Sipp market, prompting suspicions of aggressive ‘residential Sipp’ promotions. When the government made a U-turn in 2005, there was industry outcry and numerous disgruntled investors.
This time the scenario is quite different. The chancellor focused his attention on redeveloping town centres, saying: “The government will explore with interested parties whether the conversion of unused space in commercial properties in high streets and town centres to residential use could be encouraged by amending [pension] rules.”
Industry response to the news was largely positive, although with the caveats of proper safeguards, such as owners not being able to live in the investment property as their home. Some suggested an external property manager should be used and only buy-to-let scenarios permitted.
Ray Chinn, head of pensions and investments at LV=, wonders whether the government has an ulterior motive. “We remain unconvinced around some of the opportunities talked about in terms of holding residential properties within a Sipp, or commercial properties capable of conversion to residential,” he says. “Our view is that this probably has more to do with providing a boost to the housing market rather than mainstream pension provision.”
