The Hidden Resource Within Your Pension
Guest post by Neil Ryder from My Goal Is
Pensions, generally, are not hot gossip.
If you’re anything like me the most dramatic conversation you’re ever likely to have about your pension is the one that begins “Oh s**t”, when you realise your fund has only grown in proportion to the payments you have made and no more.
But it looks like that is set to change.
Back in November, I did a podcast for The Property Voice all about the untapped property investment resource that pensions represent. You may want to go and have a listen here.
Since then my phone hasn’t stopped ringing. So it’s clear that the subscribers to The Property Voice are starting to get excited about the hidden potential of their pension pots.
The main point I wished to make in the podcast is not to be distracted from the value of your pension pot by the illustration of how much income your pension would give you. Your provider might tell you that your current pot will yield an annual income amount of £x, but this isn’t telling you how much is in your pot altogether.
What you need to find out is what the transfer value of your pension pot is. That is, how much your provider has to cash out in order for you to shift your fund to another scheme.
Effectively this amount could represent a potent property investment pot that you could tap into if you found the right “pension wrapper” to enable it.
If the transfer value of your existing pension and that of your partner is around £160.000 or more it is worth thinking about moving it into a Small Self-Administered Scheme (SSAS) and using it ahead of retirement in order to grow your pot and your property portfolio simultaneously.
Now we’re talking. Instead of having a pension quietly accruing, but not really doing anything until you’re ready to retire and crystallise it, it could now become an active feature of your own investment portfolio.
Like other pension wrappers the SSAS is a tax efficient vehicle for collecting money, but there are key differences in comparison with other available schemes.
- Unlike regular pension products you are a trustee of your fund. This means you are in control, and have complete transparency over where and how the funds are invested.
- The SSAS is regulated by HMRC as opposed to the Financial Conduct Authority, which means there is greater flexibility to invest in non-regulated, asset-backed opportunities with better returns than the High Street.
- Provided you create a Special Purpose Vehicle, such as a Property Management Company, through which up to 65% of the fund value can be invested, then you can use it to build your own property portfolio, including residential property.
- Unlike traditional schemes which default to your spouse only on your death and then disappear, any money you have in the pension pot can be inherited by your dependents or anyone to whom you wish to bequeath it.
Looking at point 3 above is where we start to understand how to make funds available for investment ahead of retirement, even ahead of crystallising any part of our pot at age 55. By effectively using up to 65% of your fund to buy preference shares in a Special Purpose Vehicle which you set up you can legally use that money to invest in any type of property without incurring the 55% tax charge that other pension arrangements invoke for investments in the residential sector
The only “catch” is that at some point you have to ensure that the full value of the capital is returned to the company, and that the SPV pays out an annual dividend of at least 7% back to the pot. This means that your investment must make a profit, and you must ensure that all the correct life insurance is in place to cover the investment should anything happen to you.
Given that property investors are growing increasingly accustomed to the practice of creating a company through which to conduct their business, this type of arrangement ought to be pretty straightforward. And as I said on the podcast it provides an accessible and as yet untapped resource to grow both your business and your pension pot.
Indeed if you are already running more than one PAYE registered company you already have the structure in place to both sponsor your SSAS (company one) and invest a proportion of your pot through another legal entity (company two), operating as the Special Purpose Vehicle issuing preference shares.
For the majority of clients, however, it is the inheritability of the SSAS pot free of inheritance tax which finally convinces them to take action regarding their pension fund and do more with it. After all, for many of us the main reason for growing our investments, be they in property or other types of asset, is to provide for ourselves and our family in the future.
To flesh out how this works in practice, consider the following example:
Pension transfer value of £250,000 after transfer fees:
10% must remain Liquid: £25,000
Required for fixed investments: £95,000
Potential Preference Share issue: £130,000
These figures are for illustration purposes only. Don’t worry if your fund is less than this. We can partner people together to share costs and create worthwhile funds to use for property investment.
As you can see there is a way to work with pensions that are a whole deal more exciting than leaving them to grow quietly, or not: especially if you are a property investor.
If this sounds like the kind of thing you would be interested in pursuing with your pension pot, your first step is to contact your pension provider and ask them to tell you the transfer value of your fund, as well as provide you with release forms. Once you have the forms you can begin the process of transferring your money into a SSAS and get it working harder for you, helping you to grow your property portfolio and improving your investment return.
To find out more and discuss in greater detail what may be possible for your pension and property investments get in touch on 01793 858215, or email firstname.lastname@example.org.
The Property Voice Insight from Richard Brown
When I first heard Neil talk about the subject around a year ago and how we can potentially free up the locked in values in our pensions to help us with our property investing today, I got quite excited about the possibilities for us property investors. Imagine being able to put the value of our pension funds to use for all types of property investment purposes before our ripe old pensionable age?
Let’s just consider a couple of practical scenarios where this could come into play then shall we.
You might be thirty-something, have friends or a partner in a similar position but are struggling to raise enough investment fund to fully realise your property investing goals.
If we have been in employment, be it public or private sector, employed or self-employed, for any reasonable period of time…say 15 years or more…then we are likely to have built up quite a reasonable pension fund once personal contributions, employer contributions and tax credits are taken into consideration. Remember that with generous company pension schemes with a matched employer contribution (where applicable) and tax rebate that the total amount paid into the fund could be between 220% to 245% of our own personal contributions. Then the fund should achieve growth after costs and fees as well. It may be the case that the £80,000 average pension fund value, that Neil referred to, would be realised with a personal monthly contribution of less than £150 within 15 years. Team up with a buddy in the same place and you can start to free up your pension for future property investment purposes.
Based on Neil’s figures of a 65% funds release on the £160,000 combined fund value, we would have an investment pot available to us of c£100,000…enough to buy each of the last couple of flip projects that I have been involved with in cash or 4 of these using BTL mortgages!
So, the untapped resource here could start a flip or BTL strategy potentially.
You are on the downward slope, heading toward retirement age but feel you could be leaving some money on the table by leaving your pension to sail into the harbour of annuities.
With something like 25 years or more pension contributions from a lifetime of employment-based pension contributions, your pension fund value could easily reach the £300,000 mark or more. This could be enough to release up to £200,000 or more for property investment purposes.
Imagine investing that as a private joint venture partner on secured property assets and getting a return on investment of up to 15% per annum. This would give an income of around £16,000 per year and in addition, your investment fund would still be topped up by a further £14,000 a year as well. This compares to let’s say your average annuity of around £6,000 a year with no additional top up to the investment fund.
Now, I must say that I have just made these scenarios up by way of illustration to highlight how powerful these funds could be if we can unlock them. I didn’t discuss them with Neil and nor did I agree the figures with him, so please only treat them as purely potential, yet practical illustrations of some scenarios won’t you?
What I like the most about this form of use of our pension fund is the ability to use it to help expand our portfolio growth sooner than later and still pay ourselves a very healthy rate of interest via the preference share dividend in the process. This means, we effectively keep the underlying value of our pension pot, get a very decent rate of return on the funds but at the same time enabling us to accelerate our rate of property growth bu accessing an otherwise hidden financial resource. What's not to like about that?
Finally, please do remember and as with all forms of personal finance to do your checks and seek the correct advice along the way.