It has come to our attention in recent months that stricter borrowing limits imposed last year on self invested personal pensions are having the unintended consequence of trapping some investors with operators who no longer meet their needs.
Before A-Day a SIPP investor buying a commercial property, for instance, could borrow up to 75% of its value. The rules changed on 6 April 2006 to limit borrowing to 50% of the SIPP fund. To buy a property worth £450,000, a pre-A Day investor would therefore have needed a SIPP fund of £112,500. To buy the same value property under the new rules would require a SIPP fund of at least £300,000 to allow the maximum £150,000 (half the value of the fund) to be borrowed.
The problem now manifesting itself is that those investors who borrowed under the old rules who are seeking to transfer must pay back one loan and renegotiate another under the tighter limits. In the case above, the SIPP investor would only be able to transfer if they could find an extra £187,500 to boost the value of their pension fund up to the £300,000 now required.
Of course, over time the property value is likely to rise and the loan amount to fall, reducing the contribution needed. However, in the real world it could take years before a client - perhaps keen to move to escape high costs or poor service standards from their existing SIPP operator - is able to afford to make the necessary contribution to escape to a better deal.
Transfers under the old rules are being allowed where a SIPP client is forced to move, perhaps due to their existing operator no longer being authorised. It would be in the consumer interest to give other SIPP clients the same flexibility.
By far the best solution would be for the Government to reinstate the old borrowing limits, a case of 'better late than never' as this should have happened when the Government U-turned over its plan to allow direct residential property investment in SIPPs. Banks had policed the old rules very effectively, only lending up to 75% if they were totally happy it would be repaid. The current rules transfer the risk to the client who has to fund much higher pension contributions and to the State in the form of the soaring cost of tax relief.
First mentioned in Cridland Report
Second acquisition of 2019
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