RP case studies: Doing the sums on SIPP borrowing capacity

Jessica List runs through a SIPP borrowing case study where an adviser helps his client realise her commercial property purchase aspirations

It’s possible for a self-invested personal pension (SIPP) to borrow up to 50% of its net value in order to help fund a commercial property purchase.

This feature adds flexibility for investors considering property investment and can help facilitate investments which would otherwise have been out of scope. However, there is still some confusion when it comes to calculating the borrowing capacity when there is already a loan in place.

The situation

Katrina has held a commercial property – an industrial unit – within her SIPP for several years. The property is worth £500,000 and has an outstanding mortgage worth £80,000.

Katrina currently uses the rent to make mortgage payments and pay the SIPP’s fees. She doesn’t leave much of a surplus within the plan.

She also has a workplace pension with another provider. She has not consolidated her pensions as her employer can only contribute to the workplace scheme. Katrina also contributes to the workplace scheme as it’s simple for her employer to pay the contributions from her salary.

Katrina has been very happy with the property investment in her SIPP. A smaller neighbouring unit is now on the market for £150,000 and Katrina would like to purchase it using her SIPP. She arranges a meeting with her adviser Conor to discuss the plan further.

Katrina initially asks about transferring some funds from her workplace pension in order to fund the purchase. Conor confirms that this would be possible. However, doing this would leave Katrina’s overall pension provision very heavily invested in property. He thinks it would be better for her to leave the workplace pension as it is.

Katrina then asks about further borrowing, as she is aware that the SIPP can borrow up to 50% of its net fund value. Conor confirms that this is the case.

Katrina asks Conor how much she can borrow, as she tried to quickly work it out before the meeting but is unsure that the calculations are correct. At first, she thought that as the property is worth £500,000, she could borrow £250,000 in total. As she already has a mortgage of £80,000, Katrina thought this would leave her able to borrow £170,000 more.

However, Katrina had then realised that the property value is not the same as the SIPP’s net value: this would be the property value minus the loan. Katrina then thought that if the SIPP’s value is £420,000, this would mean she could borrow £210,000, but this didn’t sound right either, especially as it was more than the first amount she’d calculated.

Conor explains that the calculation involves elements of both of Katrina’s approaches. She’s correct in thinking that the SIPP’s net fund value is the property value less the loan: £420,000. While this gives an overall borrowing capacity of £210,000, Katrina forgot to then deduct the existing loan again, leaving further borrowing capacity of £130,000.

This won’t give Katrina enough cash to purchase the new property, particularly as she will also need to fund costs such as solicitor fees through the SIPP.

Conor reviews Katrina’s contributions to her workplace scheme and can see that she is not fully using her annual allowance. Conor still thinks that Katrina should leave her workplace pension as it is, and suggests that she should make a single personal contribution to her SIPP to make up the shortfall for the property purchase.

The results

Katrina pays a personal contribution and Conor makes the arrangements for the new loan.

Katrina’s SIPP provider is happy to work with the high street lender of her choice, subject to due diligence checks. Katrina continues to regularly contribute to her workplace scheme but is also happy to know that she could make a personal contribution or partially transfer to the SIPP if it needed additional cash.

Jessica List is pension technical manager at Curtis Banks Group