Buying business premises with pensions - by independent financial adviser John Bramwell

Using Your Pension Scheme to
Buy Your Business Premises

Introduction

Many businesses rent their premises and are happy to continue to do so as it allows some flexibility in location and doesn't tie up capital over a long term.

For others owning the business premises might be more important. This may be because the risk of not being able to renew a lease is too great due to a large investment in plant and machinery or where moving location would significantly reduce profit.

In these circumstances a commercial mortgage is often used to purchase the premises. Alternatively, there are some types of pension scheme that will allow you to purchase your business premises.

Why use pension funds?

Using pension funds:

can provide sufficient funds for property purchase or free-up capital to use on business development,
keeps you in control of your business premises,
can reduce rent or interest payments paid away to third parties,
for their tax-efficiency,
means that any increase in the value of the property will be kept for your benefit.

What are the disadvantages?

The main ones are:

lack of diversification of the pension fund and consequential increased level of risk,
potential difficulty in taking benefits when wanted due to illiquidity,
higher charges are associated with direct ownership of property in pensions than with more usual investment such as collective funds,
penalties or loss of benefits when transferring existing pension funds into a scheme capable of buying your premises.

What types of scheme are available?

Small self administered schemes (SSASs) and self invested personal pensions (SIPPs) are both available. The rules governing these are different and have generally favoured using SSASs. Pension rules were simplified in April 2006
(A-Day) and it is expected that the popularity of SIPPs will increase.

How can I purchase premises if
my pension fund is too small?

If your current pension fund is too small to buy your premises outright the main options are:

for the pension fund to use a commercial mortgage to supplement available funds. This fell to 50% of the pension fund size on A-Day. This change was dramatic and prevented the purchase of many premises after 6th April 2006.
to combine ownership of the premises with other pension schemes or members of the same scheme,
to use money from the business to purchase part of the property, with a commercial loan if necessary.

Are there any other things to consider?

Using tax-efficient pensions to purchase business premises can be very beneficial. However, such arrangements are not always straightforward and expert advice should be sought beforehand to select the best scheme and arrangement.

Please contact us for more information on using pensions to buy business premises.