RP Case Study: In-specie pension transfers

In the latest RP case study, Stephen McPhillips outlines how an in-specie transfer can be used to make property purchase possible through a SIPP when there is not sufficient funds within the SIPP to buy

Mike is a successful entrepreneur who runs a number of businesses. Over the years, he has accumulated significant pension wealth through insured personal pensions and company pension schemes. When he explained to Tanya, his financial adviser, that he was interested in acquiring commercial property to add to his existing portfolio of residential buy to lets, Tanya outlined to him the tax advantages of holding commercial property within a self-invested pension. Mike took Tanya’s advice and established a self-invested personal pension (SIPP) with one of the insurance companies with which he already held a personal pension.

The arrangement worked well in the early years and Mike’s SIPP repaid borrowing which it had entered into in order to acquire the property initially. With liquid funds then building up quickly in the SIPP through rental income and new contributions, Mike decided that he would like to invest these into a portfolio of stocks and shares using his entrepreneurial skills. An execution-only stockbroking account was established within the SIPP.

When a commercial property adjoining that owned by the SIPP unexpectedly became available, Mike was keen to acquire it. He knew the area and the local property market well and he viewed it as an ideal opportunity to increase the income stream which he would need in retirement from his SIPP. The only issue, as far as Mike could tell, was that his SIPP did not have sufficient funds with which to make the purchase and that it would need to borrow accordingly. Mike knew that SIPP borrowing of up to 50% of the SIPP net asset value (minus any existing borrowing) was possible, so he contacted Tanya to get the ball rolling.

To Mike’s surprise and disappointment, he learned from Tanya that the SIPP provider no longer permitted property purchase which required SIPP borrowing. Tanya expressed her surprise at the change in practice too and recommended that Mike transfer to a specialist SIPP provider which could accommodate his requirements.

While the change in SIPP provider would enable Mike to pursue his plans, he was concerned about what would happen to the existing SIPP-owned property and share portfolio. Tanya explained to Mike that it is possible to transfer assets from one registered pension scheme to another “in kind” rather than selling and re-purchasing them. She further explained that the industry terminology for this is an “in-specie transfer” and that it is not to be confused with an “in-specie contribution.” Tanya briefly outlined to Mike the fact that HM Revenue and Customs has recently challenged the validity of in-specie contributions, but that this in no way impacts on in-specie transfers.

Mike was also concerned about the likely time it would take to achieve the in-specie transfer of the property and the share portfolio because he realised that the value of both of these would be needed in the new SIPP in order to allow the level of SIPP borrowing he required for the new property purchase. Tanya was relieved to learn that Mike already knew the vendor of the adjacent property and that he had agreed with the vendor that the purchase could take place in around 3-4 months if necessary.

Having checked with the existing and new SIPP providers, Tanya outlined the broad process to Mike:

  • New SIPP – assesses acceptability of existing and new properties in principle and of the contents of the share portfolio for inclusion in its SIPP
  • New SIPP – outlines likely charges for the in-specie transfer of these assets
  • Mike – liaises and negotiates with lender regarding SIPP borrowing through new SIPP
  • New SIPP – established, assuming Mike agrees with cost to change provider and has agreed finance for new property
  • New SIPP – liaises with existing SIPP regarding list of assets to be transferred
  • Mike – appoints Solicitor(s) to act for existing SIPP (transferring scheme) and new SIPP (receiving scheme) in the legal transfer of the existing property from SIPP to SIPP
  • New SIPP – new execution-only stockbroking account is opened in readiness to receive the shares which are to be re-registered from existing SIPP to new SIPP
  • New SIPP – confirms ownership of existing property and share portfolio
  • Existing SIPP – transfers remaining cash balances it holds to new SIPP bank account
  • New SIPP – confirms maximum SIPP borrowing to lender
  • Mike – appoints Solicitor to handle purchase of new property in new SIPP.

Tanya stressed to Mike that the above processes can take several months so that Mike could manage the expectations of the vendor of the new property.

Stephen McPhillips is technical sales director at Dentons Pension Management