RP case studies: Borrowing for a second SIPP property

Jessica List uses this case study to outline a SIPP-based property purchase scenario

The situation

Katarina has held a commercial property – an industrial unit – within her self-invested personal pension (SIPP) for several years. The property is worth £500,000 and has an outstanding mortgage of £80,000.

Katarina currently uses the rent paid into her SIPP by her tenant to make the mortgage repayments and to pay the SIPP’s administration fees. She doesn’t leave much of a surplus within the pension.

Katarina also has a workplace pension with another provider. She has not consolidated her pensions as her employer will only contribute to the workplace scheme. Katarina also contributes to the workplace pension as it’s easier for her to simply arrange to pay the contributions from her salary.

Katarina has been very happy with the property investment in her SIPP. She’s just discovered that a smaller neighbouring unit is on the market for £150,000 and would like to consider buying it using her SIPP.

She arranges a meeting with her adviser Conor to discuss the plan further, as her SIPP doesn’t currently contain any funds with which she could purchase the property.

Katarina initially asks about transferring some funds from her workplace pension in order to fund the purchase. Conor confirms that this would be possible; however, it would leave Katarina’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. Katarina then asks about further borrowing, as she is aware that the SIPP can borrow up to 50% of its net value.

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

However, Katarina then realised that the property value is not the same as the SIPP’s net fund value – that would be the property value minus the existing loan. Therefore, Katarina reasoned the SIPP’s value is actually £420,000, so she could borrow £210,000. This didn’t sound right either though, especially as it was more than the first amount she had calculated.

Conor explains that the actual position is a combination of both of Katarina’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 overall borrowing capacity of £210,000, Katarina also then needs to deduct the value of the existing loan again, giving further borrowing capacity of £130,000.

This won’t give Katarina enough cash to purchase the new property, particularly as she will also need to fund costs such as solicitor fees through the SIPP. Conor suggests that Katarina should still leave her workplace pension untouched, and instead make a single personal contribution to her SIPP to make up the shortfall.

The results

Katarina works with Conor to work out how much she will need to contribute to her SIPP. She pays the personal contributions and Conor liaises with her SIPP provider to make the arrangements for the new loan.

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

Jessica List pension technical manager at Curtis Banks