What Can I Borrow? SIPP & SASS Commercial Mortgages
Both Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SASS) in the UK have the ability to borrow money to purchase commercial property. The schemes do differ from each other. Caveat one; the rules and limits do change so please always ask, take independent advice and check before making decisions.
At the moment, here are some key considerations for both SIPPs and SASS in relation to borrowing for a commercial property purchase.
Self-Invested Personal Pensions (SIPPs)
Commercial Property Only: SIPPs can borrow funds to acquire commercial property, such as offices, retail spaces, and industrial units. Residential properties, including buy-to-let investments, are generally not allowed.
Limited Loan-to-Value (LTV) Ratio: There are usually limits on the amount a SIPP can borrow, expressed as a percentage of the property’s value. The Loan-to-Value (LTV) ratio varies among pension providers, but it is usually a maximum of 75% of the property’s value. This is subject to being able to borrow a maximum of 50% of the value of the pension pot.
Repayment Terms: SIPP mortgages typically have to be on a repayment basis rather than interest-only. This means that the loan amount is gradually paid down over the term of the mortgage.
Interest Rates: Interest rates on SIPP mortgages can vary, albeit they tend to be slightly higher than non-pension lending due to the legals, restrictions and size of the market. It is always important to consider how interest rates may impact the overall return on the property investment within the SIPP.
Investment Restrictions: The SIPP must comply with Financial Conduct Authority (FCA) regulations regarding investments. The property investment should align with the sole purpose of providing retirement benefits for scheme members. Remember, that the benefit of the scheme members is not always aligned with your personal benefit.
Small Self-Administered Schemes (SASS)
SASS shares some similarities with SIPPs but is specifically designed for small businesses. Here are some considerations for borrowing within a SASS.
Commercial Property Acquisition: Similar to SIPPs, SASS can borrow funds to acquire commercial properties even though it remains a very small part of how properties are financed. However, the specific terms may vary based on the scheme’s trust deed.
Investment Control: SASS allows business owners or designated trustees greater control over the investment decisions within the pension fund, including property acquisitions.
Due Diligence: As with SIPPs, individuals considering SASS borrowing for property should conduct thorough due diligence. Legal, tax, and financial advice are crucial to ensure compliance with regulations and to understand the implications of the investment.
Prohibited Transactions: There are strict rules in place to prevent transactions that could be perceived as benefiting scheme members or connected parties inappropriately.
Regulations and rules regarding SIPPs and SASS can change, it is always recommended that you consult with a financial advisor or pension specialist who is up-to-date with the latest legislation. Please note that developments in legislation or regulations may have occurred after writing this article. Always seek professional advice, if you want to talk about borrowing via your pension to purchase commercial property then get in touch.
By Dave Farmer