Case Study 1: Using your pension to purchase your bakery

Mr Baker has owned a small bakery for the past 20 years and he is close to retirement. He currently rents his commercial unit. He is interested in purchasing his premises without any recourse to any costly loans. He spoke to a financial adviser who had told him he could potentially use his pension to purchase his commercial premises.

Mr Baker has a private pension plan valued at £750,000. The commercial unit will cost £450,000 to purchase outright. Mr Baker’s current private pension does not allow him to invest in commercial units directly. Mr Baker, will need to transfer his pension to an appropriate Self Invested Personal Pension or SIPP, which allows direct investments into commercial property. This is sometimes referred to as a full SIPP.

Following the 30 day pension transfer cancellation period, the pension funds can be used to purchase the commercial unit. The SIPP can also be used to pay for associated legal, surveyor, and Stamp Duty Land Tax fees.

Pros:

• Mr Baker no longer pays rent to a third party; rather he pays it directly into his pension.
• The rental payments itself are tax deductible, as they are a legitimate business expense.
• The commercial unit is also outside the Mr Baker’s estate for inheritance tax purposes.
• If Mr Baker wanted to sell the commercial unit at a later date, it can be sold free of any capital gains tax.
• Mr Baker could decide to retire as per normal and rent the commercial unit to someone else who would pay rent into his SIPP. Mr Baker could then draw on his pension fund which would then come to him as income, at which point it would be subject to his marginal rate of tax.

Cons:

• Mr Baker is investing 60% of his pension into a single asset. Therefore, should the value of his commercial property plummet, the value of his overall pension would plummet too. This could mean his retirement income needs are not met.
• Mr Baker will not be able to use this commercial unit as a security against any future lending he may require.
• The full implementation cost could be prohibitive and would require an adequate investment horizon before the costs are fully recovered.

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