A law firm has warned that some property investments made with Harlequin Group via a self-invested personal pension (SIPP) may have breached lending rules.
Regulatory Legal Solicitors has reviewed contracts where investors have invested in a Caribbean property with Harlequin - a UK-based overseas property sales agent that is not regulated by the Financial Services Authority (FSA) - via a SIPP.
Both the pension adviser and the SIPP itself appear in all cases to have missed the limitation on lending where pension schemes are involved, the law firm said.
Under SIPP rules, the maximum that can be borrowed to finance a property purchase and development is restricted to 50% of the fund's net assets, less any existing borrowings.
Regulatory Legal Solicitors has reviewed just under 100 Harlequin cases involving pensions and found the average fund exposure to Harlequin is 80% of the pension assets. Some are as high as 100% of investable funds, it said.
The Harlequin Property proposition is that 30% is placed as a deposit and then a 70% mortgage is put in place at completion. The 70% mortgage would exceed the 50% allowable gearing where pensions are used.
In the example of a £100,000 property, this would mean £30,000 is used by a SIPP as deposit, making the maximum loan against equity £15,000 (50% of £30k), meaning the total available from SIPP would be £45,000.
This leaves a shortage of £55,000 making completion impossible unless the pension member is prepared to fund the difference, Regulatory Legal said.
The company said its research suggests that the bulk of investors have no further funds to commit to the scheme.
A spokesperson for Regulatory Legal said: "The conclusion is that investors will struggle to complete matters. The duty of care and obligation to protect the pension and the SIPP lies with the adviser and the SIPP trustees. It does not lie with Harlequin itself."
Regulatory Legal Solicitors is advising investors to make precautionary claims to SIPP providers and their pension advisers to protect the professional indemnity insurance position.
"The Harlequin model requires 70% gearing to make it work for most investors. The limits on lending within a SIPP restricts what can be borrowed for completion. The gap between the two means in most cases that completion would be impossible to achieve," a spokesperson said.
Greg Kingston, head of marketing at Suffolk Life, said: "It seems like borrowing rules would have been breached in these cases. The way some of these investments have been sold takes the maximum from the outset. It is a concern."
Andy Leggett, head of SIPPs business development at Barnett Waddingham, the independent firm of actuaries and consultants, said SIPP providers must do their due diligence.
"We would go through an investment committee, look for potential taxable property implications, the risk of the investment turning negative in value and, of course, borrowing limits."
Acquisition completed earlier this month.
Changes to take place by next year
Launched 18 November
Investment Association to create new labels