Jessica List runs through a land purchase-focused case study where an adviser helps make a client’s pensions wishes come true
Emil has seen a plot of land for sale for £75,000. The land is in an area that Emil thinks could be an important site for development in the future. He would like to purchase the land, as he believes it will significantly increase in value if this should happen. He’d also like to consider developing the property himself before selling it on, although he doesn’t currently have the funds to do so.
Emil would like to use his pension to purchase the land if possible, as he understands that if the property does increase in value, the profit won’t be subject to capital gains tax when he sells the land from his pension. Emil has a little over £75,000 in his pension. He approaches financial adviser Leanne to ask about the next steps.
Liquidity and diversity
Leanne agrees that purchasing the property using a self-invested personal pension (SIPP) could be a good option for Emil. However, she immediately identifies two issues: liquidity and diversity.
Emil’s pension funds will just about cover the purchase price and associated fees, but will leave very little cash left over. As Emil expects to simply hold the land in the SIPP for at least a few years, this means that no rent will be going into the plan. Emil’s SIPP therefore would not be able to pay for any ongoing fees or costs. Leanne knows that while some SIPP providers will accept vacant properties, they often require a cash float to cover ongoing expenses.
The situation will also leave Emil’s pension very poorly diversified. As the land would use his whole pension fund, he would have nothing left over to invest elsewhere.
Leanne can see that Emil has only been contributing the minimum required under his employer’s auto-enrolment scheme, although he is earning good money. Emil admits that he used to contribute more at his previous job, but since joining his current employer and being auto-enrolled he hasn’t made any changes.
Leanne contacts Emil’s employer and finds out that with matching employer contributions, Emil will be able to put approximately £9,000 gross a year into his pension. The employer is happy to pay the contributions into Emil’s chosen SIPP. Leanne calculates that Emil can afford to make additional personal contributions to bring the annual total to £15,000 gross.
Leanne also calculates that Emil can afford to pay a one-off contribution of £45,000. She explains that while this is above the annual allowance of £40,000, Emil can use carry forward to make this larger contribution without incurring a charge.
Emil transfers his pension to the SIPP provider he and Leanne agree on. He pays his single contribution and liaises with his employer to set up the increased regular contributions to the SIPP.
This allows him to buy the piece of land and diversify his pension with other investments, while also creating liquidity within the plan which can be used to pay any ongoing expenses. Emil could also consider using some of these funds to pay for development on the land in the future.
Leanne confirms to Emil that he could apply for planning permission at any time. However, if he decided to complete any residential development, he may be required to sell the land from the SIPP before any building works actually began. If the land was going to be developed for commercial use, this should be able to take place while the land was still held within the SIPP.
Jessica List is pension technical manager at Curtis Banks