In our latest guest blog, James Randall of IPM reveals the all-important four D’s of joint SIPP property purchase.
Combining SIPP monies to purchase commercial property is a popular investment strategy for the clients of IPM. Whether the members of the group are business partners, husband and wife, company directors or siblings the pooling of SIPP (Self-Invested Personal Pension) monies gives clients greater purchasing power and prevents having to approach a bank for funding or pay additional pension contributions.
However, where a purchase is being undertaken by more than one client, there are additional areas to consider, which can impact each member of the group involved, long after the purchase has completed. At IPM we call these the Four D’s:
Using a case study we can look at how each of the Four D’s can affect a property held by more than one client. Tom and Rhys are company directors who combined their SIPPs to purchase a warehouse unit for £200,000 on a 50/50 basis in 2007. They run their business out of the warehouse and pay rent to the SIPPs for use of the premises.
Unexpectedly, Tom dies. His death benefit nomination for his SIPP indicates that he wishes to evenly split the value of the SIPP between his two adult children. Tom’s SIPP holds cash of £15,000 and his share of the property is valued at £115,000, giving a total value of £130,000. This poses a problem as there is insufficient liquidity within the SIPP in order to comply with Tom’s request.
Ultimately IPM may be forced to sell the property to generate the liquidity and pay the death benefits. However what impact will this have on Rhys and his business if the property has to be sold? It is possible that Tom’s share of the property could be sold as opposed to the whole unit, perhaps to Rhys’ SIPP or Rhys personally, so he can retain control over the property and his business. Alternatively a new individual could be added to the group in order to purchase Tom’s share of the property.
Tom and Rhys have a disagreement as to how the business should move forward, which results in Rhys announcing that he is going to leave the business. This has an impact Tom and Rhys’ SIPPs, as Rhys has indicated that he wants to sell his share of the property too. Unless Tom has sufficient liquidity within his SIPP to purchase Rhys’ share, then IPM could be required to sell the property. Tom can make contributions to his SIPP to bring the liquidity up to the required level, buy Rhys’ share personally or within the company, or bring in another SIPP member to replace Rhys’ share.
Before a group property purchase is made it will need to be ascertained when each group member is likely to take benefits from their SIPP. If you have one group member aged 30 and another aged 65, it is highly likely that the elder member will want to take their 25% tax-free cash, also known as pension commencement lump sum, before the younger member is ready to do so. If the property is to be retained, then the group will need to have sufficient liquidity to pay out the lump sum. This may be provided for from cash, or other assets within the members’ SIPPs, but may require the “purchase” of a portion of the property by the younger member, from the older, who is looking to go into drawdown. This may take the form of a transfer in the interest of other assets held for the benefit of the younger member, to the older member, for an equivalent additional share in the property.
In Tom and Rhys’ scenario, they are both of similar age and their financial adviser spoke to them about their plans to go into drawdown before the purchase process commenced. However, their financial circumstances could change in the future, leading to one them needing to take their lump sum, will there be sufficient liquidity within the SIPP to pay this?
Rhys is going through a divorce and IPM receives a pension sharing order from the courts. This states that IPM is to pay a high percentage of Rhys’ SIPP value to his ex spouse and it has been indicated that the ex spouse wishes to receive this as a cash transfer to another scheme.
If Rhys has insufficient cash within his SIPP to settle the pension sharing order, then he may be required to sell his share of the property to raise the necessary funds. If Tom has insufficient cash in his own SIPP to purchase Rhys’ share, this could ultimately mean the property has to be sold at the detriment to Tom and his business, through no fault of his own. Unless there is another way of financing the transfer value, for example mortgage of the property, payment of contributions, inclusion of another SIPP member with the group, etc.
It’s all about liquidity
Each of the Four D’s has the same thing in common, liquidity. It’s crucial that before the purchase process commences that there is a ‘plan B’ discussed in principal, not only will this reduce the impact on the client directly affected by one of the ‘Four D’s’, but for remaining members of the group too.
In the right circumstances, group property purchases can be an excellent and an alternative way for clients to purchase a property, which otherwise may be out of their reach. However, it must always be remembered that things can go wrong and whilst the ‘Four D’s’ may not cover all of the downside permutations, they provide a starting position for formulating a ‘plan B’ for your clients.
I.P.M. SIPP Administration Limited is authorised and regulated by the Financial Conduct Authority (FC) to provide Self-Invested Personal Pensions only. We cannot provide financial advice and work in conjunction with Independent Financial Advisers for the benefit of our clients.