Paula Jones (25) is a self-employed plumber facing a dilemma. She has been diligently building her pension savings with a view to buying a commercial property to use as the premises for her business. However, the perfect property has just come onto the market, and Paula’s SIPP isn’t yet large enough to purchase it.
Her pension is currently worth just over £125,000, of which £37,500 is in beneficiaries’ drawdown, inherited from her late grandmother Margaret. Paula also received a £50,000 lump sum from Margaret, part of which she has already used to make the largest tax relievable contribution possible this tax year, based on her earnings and annual allowance. Paula has £19,600 of the lump sum remaining outside of her pension.
The property Paula has spotted is on the market for £200,000. It’s a bit more than she was hoping to spend, but it’s absolutely perfect for Paula and in a very popular area; she doesn’t think it will be available for very long. She calls her great-uncle Steve, who has always offered her very good advice about her business, to discuss ideas for possible solutions.
Paula knows that her SIPP provider would accept a gross personal contribution – she would just need to let them know when she made the payment that it was above her earnings for the year and therefore would not attract tax relief. Paula has worked out that if she contributed the remaining £19,600 of her inheritance and then used the facility to borrow up to 50% of her SIPP’s net fund value, she would have just enough to fund the purchase, pay the fees and stamp duty, and leave a small float left over. This is the only way Paula can think to purchase the property.
Steve agrees that this is a possibility, but says that it also seems unwise for Paula to put all of her pension savings plus a large loan into the property. It could be a long time before Paula would be able to diversify her pension. It also seems a shame for her to miss out on the £4,900 of tax relief she could get if she waited until next tax year to contribute the £19,600.
Steve asks if Paula knows whether her provider would allow her to purchase and own only part of the property. Paula confirms that her father, aunt, and grandfather currently own a property jointly between them with the same provider, but this isn’t what Steve meant. He asks Paula to find out if her provider would allow the rest of the property to be owned not by another SIPP, but by a third party in a personal capacity. Steve’s heard of providers offering this facility before, but doesn’t think it’s particularly common. He’s also heard of different ways that it might be achieved and isn’t too clear how it works, or who would be responsible for things such as collecting rent.
Paula calls her provider and confirms that this option is available. The representative offers to send Paula information about how the structure works so that she and Steve can read it in their own time and come back with any questions.
Paula and Steve read through all the information provided and decide to proceed with the property purchase. They’re happy that they understand the ownership structure and who will be responsible for each aspect of the ongoing management of the property.
They agree to an initial 50/50 split of the property ownership, which allows Paula to purchase her share comfortably with her existing pension funds, and means that she can wait until next tax year to make further contributions and receive the tax relief she would then be entitled to.
Steve is happy to hold his share of the property for a few years while Paula builds up her pension funds, and will be happy to change the ownership proportions as she requires. Paula hopes to eventually own the whole property and to be able to diversify her pension investments.
This case study is part of Curtis Banks’s ‘Meet the Joneses’ series of intergenerational planning case studies.
Jessica List is pension technical manager at Curtis Banks