Sipps - Self Invested Personal Pensions (Sipps) And Property Investment

The FSA (Financial Services Authority) are the government agency that since April 2007 have been responsible for regulating SIPPs. This is how they describe a SIPP:

Self-Invested Personal Pensions (SIPPs)

The self-invested personal pension (SIPP) itself is a pension wrapper that holds investments until you retire and start to draw a pension income.

SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they choose. They may have higher charges than other personal pensions or stakeholder pensions. For these reasons, they are more suitable for large funds and for people who are experienced with investing.

With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. SIPPs are a form of personal pension scheme that give you the freedom to choose and manage your own investments. Or you can employ and pay for an authorised investment manager to make the decisions for you.

Most SIPPs allow you to select from a range of assets, such as:

particular stocks and shares quoted on a recognised UK or overseas stock exchange;
government securities;
unit trusts;
investment trusts;
insurance company funds;
traded endowment policies;
deposit accounts with banks and building societies;
National Savings products; and
Commercial property (such as offices, shops or factory premises).

This list is not exhaustive and different SIPP operators will offer different ranges of investment choices.
It's unlikely that you will be able to invest directly in residential property within a SIPP. Residential property can't be held directly in a SIPP with the tax advantages that usually accompany pension investments. But, subject to some conditions including restrictions on personal use, residential property may be held in a SIPP through collective investment vehicles, such as real estate investment trusts or property trusts, without losing the tax advantages. However, not all SIPP operators accept this type of investment.

For all practicalities, direct property investment held in a SIPPs “wrapper” is restricted to commercial properties such as shops, offices and factory premises. This stipulation means that many ordinary potential property investors are effectively excluded from taking advantage of the favourable tax breaks that come with a SIPPs portfolio.

UK-REITs and SIPPs

However, indirect investment through one of the newly formed UK-REITs, means that it is still possible to have a stake in property and gain valuable tax advantages.

What is a REIT?

Defined as a company that is listed on a regulated investment exchange, e.g. The London Stock Exchange, a UK-REIT is a vehicle for investing in property which carries certain tax liability advantages.

Although we refer to REITs as real estate investment trusts, they are not trusts as most people understand the term. They are just like any other private investment companies. The only substantial difference is that once registered as REITs, companies will benefit from various tax breaks and these tax advantages are then passed on to you as a REIT investor. The company owns revenue-producing commercial and residential properties which in turn generate potentially high returns for investors.

Launched on the 1st of January 2007 as a way of making it easier for ordinary investors to invest in a variety of both UK and overseas property, REITs allow you to invest in commercial real estate such as shopping centres, out of town retail parks and offices, as well as residential properties.

As an investor in a REIT, you don't actually own a part of a property, but you do benefit indirectly in the form of annual dividends from rental profits generated by the REIT. What is more, you also gain from certain tax breaks, and the fact that your investment interest is easy to buy and sell, gives you the liquidity you will not find with traditional direct property investment.

UK-REITs, SIPPs and overseas property investment

One of the more fanciful myths that has emerged since the inception of REITs is that they are not permitted to invest in overseas real estate. This is plainly untrue. Leading international property investment company, Hammerson PLC, applied for, and successfully gained, REIT status in January 2007. Hammerson currently have commercial real estate interests in both Britain and France. As more companies convert to REIT status, it is only a matter of time before these newly established REITs will seek the huge profits associated with emerging global property hotspots. The same huge profits that have been enjoyed by direct private investors for a number of years.

A winning combination?

Although investing directly in property via a SIPP is probably out of the range of many ordinary investors, REITs, albeit indirectly, and for a relatively small initial capital outlay, allow you to benefit from the potentially healthy returns generated in the property sector. These returns can then be incorporated within a SIPPs portfolio. So a combination of a SIPP and investment in a REIT, not only gives you access to the property sector, you also benefit twofold from the tax advantages which come with these attractive financial entities.