How to incorporate properties into a Self Invested Personal Pensions (SIPP)

If your client has a SIPP or drawdown pension which holds one or more properties, it is possible to model this in the software so that the property and its related debt, income and expenses are shown as held within the pension.

Note - This functionality is only available for money purchase pension type 'Self Invested Personal Pension' and Drawdown Pensions. At present, it is not available for SSAS - a work-around would be to model the SSAS as a SIPP and use the pension name to indicate it is a SSAS.

Tips - It is possible to link more than one property to a pension. Properties already held by the pension and properties which will be purchased by the pension in the future can be modelled. It is also possible to model the sale of the property within the pension at a future date.

How to link a property to a pension

In this example the client has a SIPP which owns assets worth £1.5m, of which £500,000 is an investment portfolio and £1m is a rental property. The rental property has a £400,000 debt so the overall value of the SIPP is £1.1m. The net growth on the investment portfolio is assumed to be 5% pa and capital growth on the property is assumed to be 3% pa. The property has £50,000 pa rent and £5,000 pa expenses (excluding the mortgage payments). The client plans to sell the rental property at retirement and transfer the proceeds to the investment portfolio within the SIPP.

1. Firstly, add the pension to the client record, if it has not already been input, using the + button in the bottom right hand corner of the Dashboard.

The balance of this pension should be the current value of the pension excluding the property value i.e. the value of the pension's cash and liquid investments. Set the growth and fees appropriately and add the details of any contributions.

 

2. Add the property, if it has not already been input, using the + button in the bottom right hand corner of the Dashboard. Select the relevant Asset Type, which would usually be Rental Property. It isn't possible to link a property with Asset Type 'main residence'. Once done, the Is Held By Account should appear: 

3. Toggle Is Held By Account on and a dropdown box will appear from which you should select the pension which holds this property. Note that if the pension does not appear in this dropdown, you should check the pension type.

4. Give the property and name and input the Market Value (current value), the Purchase Value (original cost) and select whether it is a new purchase or not. The growth rate should reflect the assumed capital growth rate for the property:

5. Click Timing on the left hand menu and set the Start and End events. For existing properties select Plan Start as the Buy Event. For new properties, select an event in the year it will be purchased by the pension. If the property will be held for the duration of the plan, select Plan End as the Sell Event. If it will be sold before plan end, select an event in the year it will be sold as the Sell Event.

6. If the property has a mortgage, click Linked Debts on the left hand menu then select the relevant debt if it has already been input, or click Create and Link a New Debt > Debt to add a new debt. 

Input the details of the mortgage and click Done:

7. If the property has expenses other than the mortgage payments which are paid for by the pension, click Linked Expenses on the left hand menu then select the relevant expense if it has already been input, or click Create and Link a New Expense to add a new expense. Input the details and click Done:

8. If the property has income which goes into the pension, click Linked Income on the left hand menu then select the relevant income if it has already been input, or click Create and Link a New Income to add a new income.

Input the details and click Done:

9. Click the Done button, top-right:

How is the value of the property held by a pension shown

Once a property is linked to a pension in the software, the value of that property (less the balance of any linked debt) will be added to the balance shown on the pension entry to obtain an overall value. In this example the starting value of the SIPP is £1.1m (£1m - £400,000 + £500,000) which can be seen in Overview  > Balance Sheet:

The value of the property held by the pension will show in the Pensions category in the simple Assets chart, it will not be included in the Non-Liquid Asset category. The Detailed Assets chart will not show a separate entry for the property held by the pension, it will be included as part of the overall value of the pension:

Note that the Dashboard will show the property and any debts linked to the pension as separate entries, so the pension value on the Dashboard will only show the value of the non-property part of the pension.

The income and expenses are also listed on the Dashboard. Any items held by a pension will show a moneybox symbol next to them:

What happens to the linked income and expenses?

The income and expenses linked to the property will not show in the Cash Flow chart as this chart only shows the clients personal cash flow. The details can be seen by clicking Year View > Cash Flow:

And Year View > Expenses:

Click Year View > Pensions then click on the relevant pension to see a breakdown of the end of year value:

The linked income and expenses will not show in Overview > Income v Expenditure as this just shows the personal income and expenses.

What happens to the rental income?

Once linked to a property held by a pension, the income will not be taxed.

Income linked to a pension cannot be used to directly fund the clients personal expenses. It will be used to pay expenses linked to the property held by a pension.

If the linked income is greater than the linked expenses, the net income will show as Net Held Income in Year View > Pensions. This held income will be added to the EOY investment balance:

Note regarding expenses - expenses linked to the property held by a pension will be funded from the income linked to the property held by a pension. If the income is insuffficient to pay the expense, the difference will show as Net Held Loss in Year View > Pensions. The held loss will be deducted from the EOY investment balance:

Will the property be sold to fund pension withdrawals?

The software will not automatically liquidate the property to fund pension withdrawals. Pension withdrawals will be funded from the investment balance in the pension.

Tip - This means that when the Retirement Spending Insight is run, the property within the pension will not be sold, unless it has been manually set to liquidate earlier than Plan End. 

The property can be sold manually using the Property > Timing screen. Set the Sell Event to use an event in the year the property should be sold.

Once done, the property will be sold at the start of the year, any linked debt will be repaid automatically and the net balance added to the investment balance before investment growth is applied.

In Year View > Pensions for the year of the property sale, the EOY Value for the property and debt will show as £0, there will be no income/expenses for the year of sale and the EOY Investment Balance will be increased by the net proceeds, plus investment growth on the combined value.

There will be no CGT on the sale of the property within the pension.

What happens to the property when the owner of the pension dies?

This depends on the property timing. If the Sell Event is the pension owner's mortality event, the property will be liquidated and the net balance added to the investment balance, so that the inherited pension only has an investment balance.

If the Sell Event is Plan End or their partner's mortality event, the property will not be liquidated and will form part of the inherited pension.