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In a time when property investors and business owners are looking at smarter or more cost efficient ways to hold property, what property to invest in, and how to make their property investments work harder for them, one of the options clients may not realise is a possibility is that of borrowing through their pension.
Continuing our series of ‘How to make your money work harder and smarter’, in part 3 we look at the potential to borrow through your pension, and whilst this may not be suitable or available for all, can be an effective way to buy or hold property.

Borrowing through your pension

Whether we are working with an introducing partner or directly with a client, borrowing through a pension is something that we would only suggest after careful consideration. Where appropriate, clients are able to borrow to support the purchase of suitable property using the value of the assets already held in their pension fund. Importantly, this is a finance route that Omega would only suggest after taking suitable advice from your accountant or another recognised advisor. This is simply because there is much to consider before choosing this finance option.

Clients can sometimes be surprised how competitive interest rates are for this sector, available through trusted well-known lenders with appetite to support what growing demand across the market.

“Not all lenders support borrowing through a pension, so it is important to work with a specialist broker who understands the terms available from the whole of the market”.

There is a wide variety of terms and options available to allow clients to borrow through their SIPP (self-invested personal pension or SASS (small, self-administered scheme) when looking to purchase or finance a commercial or semi-commercial property. With the right advice, borrowing through your pension scheme can offer a solution to finance commercial property either in respect of an investment or as part of your own trading business.

What can you borrow: terms and rates

There are of course legal limitations around pension borrowing such as not exceeding 50% of the value of the fund. This means of accessing finance is also only available for commercial property or semi-commercial assets as attempting to do this on a residential property is negated by the tax implications that simply do not justify the process. In terms of what can be borrowed, this can often mirror terms available where buying through other entities, including personal names, limited companies and partnerships.
The debt agreed must adhere to the legal limitations around pension borrowing, but assuming this is the case; where the property is occupied by the beneficiary’s trading business (as the tenant), terms can be secured up to 80% loan to property value. In some sectors this can go as high as 100%.
For investment purposes (third-party tenant), 75% loan to property value is more realistic.

Advantages and Disadvantages

There are some significant advantages to using your pension to buy or hold property, able to access cash held within your pension pot, benefit from tax legislation allowing: rental income to accumulate within the SIPP/SASS, reduce corporation income tax liability, reduce capital gains tax liabilities and more. As stated earlier, its vitally important suitable advice is taken to ensure this is the appropriate choice for each individual.

If you are considering pension borrowing, click the button below.