Question: My client, against my best wishes, invested in commercial property in their pensions plan. Do the panel advise them to sell before going into Income Drawdown?
Fiona Tait - Scottish Life
The issue with property is one of liquidity. If the client is not intending to take any income, or has enough invested in liquid assets/rental income to support the income they do need, then it may not be necessary to sell the property. The client could then hold on to it until such time as the market is most favourable for a sale.
If the client does need ongoing income then a property investment is probably not the best vehicle to provide it. The client would have to make a decision as to which is their priority - their need for income or their desire to keep the property investment.
Another factor to consider is whether the client will need to transfer to access income drawdown. If they do it is possible to do an in-specie transfer of the property, however this is a long and complicated process. Most clients do not appreciate the time it will take and the resulting costs.
Stewart Dick - Hornbuckle Mitchell
Many of our SIPP cases that are in income drawdown have commercial property within their portfolios, with a secure rental income being viewed as a solid base to support the pension income. However, as with all investments, property is not without it's risks and it may well make sense for the portfolio to be diversified with other investments as well.
The primary concern with property in these cases is liquidity. Are there sufficient liquid funds available to pay out the Pension Commencement Lump Sum, and can the fund continue to meet the requirement for income without the need to sell the property (which may not always be easy)? These concerns are heightened where the property is leased to the member's own business - particularly if this is a family firm. If the property had to be sold, could the company afford to buy it, and if not, would the company be able to survive if the premises were lost? When considering these matters it may be worth remembering that the PCLS can be paid by way of an in-specie movement of property if necessary, and there is no problem with part of the property being inside the pension fund, and part being held outside. A similar concern arises around the death of the member - would the property need to be sold to pay death benefits? Again, the property could be paid out in-specie to make the lump sum payment on death, provided that there were sufficient funds available to meet the relevant tax charges.
Commercial property can be a valuable asset as part of an income drawdown portfolio - both pre and post 75. However, it is important that the wider issues are considered - liquidity, need for income v. need for the property, position on death etc.
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