In his first guest blog for Investment Sense, founder of Astute Trustee Services, Andy McLaughlin, looks at a different type of SIPP lending:
If you are like most people in this country you started thinking about your pension way too late in life, which is hardly surprising with all those commitments – mortgage, kids, university fees, weddings and not to forget the ageing parents who are increasingly becoming dependant on you to meet their living costs.
And now, just when you have good income or corporate profits and are reaching the zenith of your career, find that the annual allowance is restricting you building this pension value. Yes, you are aware of the carry back rules and amending your Pension Input Period, which your adviser correctly identified would permit a large single premium. However, this has only allowed you to top up a small amount of what you should have invested over your working life. Now faced with the annual amount restricted to £40,000 this is not nearly enough to maintain the lifestyle you are currently enjoying and getting used to. For the first time in your life you don’t have to think about money or the price tag on the stuff you want to buy.
At Astute we have developed a Self-Invested Personal Pension (SIPP) which will permit you to gear up your investment, to allow for greater growth, to accelerate your pension pot.
The Astute Corporate SIPP will allow you to borrow against your investment portfolio by as much as 90% of certain underlying investment assets; although overall borrowing cannot exceed 50% of the total net pension value. At attractive levels of interest, in some cases as low as 2.25%, this allows a great opportunity to invest into higher growth assets or even property.
This type of lending is available via a range of private banks, with whom we have exclusive arrangements. Generally no set up or settlement fee is charged and interest is charged on the daily balance outstanding, so access is relatively straight forward.
But surely my own SIPP will allow this I hear you say?
Some SIPP providers name you as member to act as a trustee. If this is the case the answer is “no”, as you would need to opt out of the Consumer Credit Act and this is not permitted.
The Astute Corporate SIPP does not have a member Trustee and is therefore not caught by the Consumer Credit Act with the result that this permits the borrowing described above and the ability to give your pension a boost.
Let me give you an example:
Jim is 56 with a pension valued at £750,000. The investment portfolio of his SIPP is worth £600,000 and is invested in a portfolio with £420,000 equities and £180,000 fixed interest and providing historical returns of 7%. This would allow borrowing of approximately £210,000 on the equities and £162,000 on the fixed interest, a total of £372,000 at an interest rate of 2.25% or £8,370 per annum. Let’s say he now invests this in a commercial property and expects a rate of return in the region of 7% or £26,040 per annum. This would provide extra investment return of £17,670 per annum (£26,040 – £8,370).
This has the effect of boosting the 7% return by a further 2.94% per annum (£17,670/£600,000). Over a 10 year term this would add £293,122 to your pension value if it continues to grow at 7% per annum.
There are risks of course
Of course this type of gearing is not for everyone, as there are significant risks, for example:
- Interest rates could rise, pushing up the level of the monthly repayments
- The return on the investment could fall reducing or even eliminating the gap between the expected return and the loan repayments
- The value of the investment you make, for example a property, could fall in value, below the amount you borrowed, effectively leaving you in negative equity
- If you buy a property and the tenant defaults on the rental payments you will still have to make the loan repayments
As I said, this isn’t for everyone and professional advice should be sought before moving forward
Interested in giving your SIPP a boost?
If you would like more information about this why not approach your Independent Financial Adviser and ask him to contact Astute Pensions for details or call us direct and we will be happy to provide this for you.
Tel: 01772 781889 or email email@example.com
The all-important small print
As we said earlier, borrowing to invest will increase the level of risk you are taking and the potential losses you could incur.