Woodruff Financial Planning blog

Self-invested personal pensions (or SIPPs) can offer property investors a tax-efficient way of holding commercial property. There are many benefits to this approach, but there are also quite a few limitations. Therefore, you should only enter into this kind of arrangement with specialist advice. This post aims to give you some of the main pros and cons of owning property through a SIPP. 

What is a SIPP?
A SIPP is a specialist type of registered personal pension, which allows you a very wide investment choice. One of the permitted investments is commercial property.By owning a property through a SIPP you can avoid tax on the income and sale of the property, although there are limitations over the control of the property once it is owned by the pension fund.

The process of owning a property through a SIPP
A SIPP can buy and manage any commercial property as an asset of the pension scheme. Once bought, the property is actually owned by the scheme itself, which does place restrictions over the property. In particular, once in the pensions arena, the money cannot be transferred out again. This means that you would need to be aware of the general restrictions on pensions, as well as the financial and age limits which apply.

Once owned, the rent paid would be paid directly to the SIPP, and any loan repayments would also be paid by the SIPP. Any growth in the value of the property would be tax-free, as would income. General maintenance costs and other fees would be paid out of the income or assets of the pension fund.

Ultimately, as the owner of the pension fund, you would benefit through tax-free growth until you come to take the benefits from the pension fund. 

What kind of property can be owned through a SIPP?
A SIPP can only contain commercial property. This includes freehold or leasehold land, and can be overseas. Commercial property can include: 

• Shops & offices
• Warehouses & business units
• Hotels
• Nursing homes
• Pubs
• Farmland or forestry
• Development land

Usually, any property which has any residential component will not be allowable. 

Who uses SIPPs to invest in property?

• Property investors & developers
• Business owners looking to buy their commercial premises

Often, investors will seek to utilise existing pension funds held within other pensions to purchase a property. We work with clients to help them to consolidate older pension funds to form one larger pot which can be used to buy a property. 

This can also be done with new contributions, which would attract tax relief in the usual way. 

For personal contributions, for every £100 invested into the pension plan, £25 will be added as tax relief; for higher rate tax payers a further £25 can then be reclaimed through your tax return. For company contributions, these can be offset against corporation tax. 

Fees
A SIPP provider will charge various fees, depending on their charging model. You should expect to pay fees relating to: 

• The acquisition of the property with a mortgage – perhaps £1,500, depending on the work involved
• Ongoing management of the SIPP – perhaps £700pa
• Valuation, legal and lenders’ fees depending on your purchase method.

Tax
A SIPP will purchase a property just like with any other transaction. Therefore you would need to pay Stamp Duty and Land Registry fees in the normal way. Some purchases may be liable to VAT. 

Borrowing to fund the purchase
A SIPP can borrow against the scheme assets to buy a commercial property. The maximum allowed would be 50% of the net scheme assets, less any existing borrowing. It is also possible to borrow to develop land purchased by the SIPP. 

You would need to find a commercial bank which would be prepared to lend to the SIPP, although this is common practice. 

Joint purchases
You may pool together with other SIPP investors to allow a property purchase, although there can be practical issues to resolve in this scenario. 

For example, careful consideration needs to be made as to what happens if one of the investors dies or wishes to realise their investment. This can be dealt with in some form of co-ownership agreement. 

The percentage of ownership can be unequal, but care should be taken where one owner borrows while another does not, as this puts the latter at greater risk to their fund. 

How we can help
We can help you to examine the market to find the right SIPP for your needs. We can then help you to source the appropriate lenders and facilitate the purchase of the commercial property. 

Pensions are a very complex area, so it is vital that you undertake any transaction with the benefit of financial advice. 

Download this post as a factsheet.

Today, I met with a new client.  He is approaching 60 and has been running professional practice for some years.  He is now considering retirement.

We started off by discussing his pensions, and other assets, as well has his income sources for the future.  However, it quickly became clear to me that what he really needs at the moment is to know if he can be confident to retire; after all, this is a big decision.  Once he gives up his professional practice, his income will be limited, although he can always work as a consultant.

What we spoke to him about was the concept of comprehensive financial planning.

We will begin by analysing his future goals, income, expenses, assets etc, and then put these all together to work out whether he can be confident to retire now, or whether he will need to work for a few more years to build up more resources.  This is a big decision, so needs to be taken with his eyes wide open.  Out philosophy is that it is better to know the real value of your money and assets so that you can enter retirement confident that you can be financially secure; if this is not the case, then we can start to work on what will achive your goals.

We will be able to paint a picture of his retirement as if he had retired yesterday.  If his resources are not enough, we can start to look at other options by examining different scenarios, such as retiring later, spending less money, working part time, downsizing his home etc.  After all, these decisions need some careful planning.

Once this has been done, we can agree a strategy to best meet his needs, and this will result in some major changes to his current financial situation: taking pension income, amending investments to focus on income rather than capital growth, and possibly the sale of his home.  We will work closely with his accountant as there will be other issues raised by the exit from his business.

We find this a rewarding process in that we are actually helping the client to realise his ambition to retire on enough income to achieve his future desired lifestyle.  from the client’s point of view, this is not about financial products, but more about financial planning to give him the confidence to stop accumulating and start spending.

See out Financial Navigation service for more details.

You will have probably seen the recent reports that inflation has shot up significantly in the last few months, and now rests at 3.5% as measured by the Consumer Prices Index (CPI), the inflation measure preferred by the Government.  Interestingly, the Bank of England predicts that this will drop back again later this year, before rising again.  See here for details.

This is largely due to the increase in VAT at the start of the year.  This measure strips out mortgage costs, and the Retail Prices Index (RPI), which includes these costs, was at 3.7% in January. 

This should be of concern to you if you have bank savings, or are on a fixed income (perhaps a pensioner).

I saw a couple this week, who had recently signed up to a fixed rate bond account with a major high street bank.  They had invested £10,000 each.  One client pays higher rate income tax (at 40% of interest received), while the other pays basic rate income tax (at 20% of interest received).  The rate they have been guaranteed is 2.8% per year over 2 years, but this interest is taxable.  Therefore, after tax, the basic rate tax payer will make 2.24% per year, and the higher rate tax payer will make 1.68%.  While these are not fantastic rates, they are typical of the bank market at present.  The clients consoled themselves that at least they are guaranteeing their capital.

The money won’t actually go down – the deposits will be guaranteed to come back to them as they cannot go down in value, the bank is well capitalised and the deposits would be covered by the compensation scheme.  But when you think about the effects of inflation, they do not look so great.  With inflation currently at 3.5%, they will actually be losing money in real terms.  The basic rate tax payer will be effectively losing 1.26% per year in real terms, and the higher rate tax payer will lose 1.82% per year.

Now, everyone should have some money on deposit to use as a rainy day fund, but these investments were not taken for this reason.  The fact is that they are tied in for 2 years, so they are now locked into this account (or face losing the interest).

The point is that you should not just look at the headline rate of your investments and savings.  You should also think about tax, charges and the effects of inflation.  Obviously, we can help with this (particularly with our Portfolio Management service).

We often come across financial services firms which call their advisers “Financial Planners”.  They might call themselves Financial Planners, but what most of them offer is financial product sales.  The purpose of this post is to give you an idea of what we do as Financial Planners, compared to other Independent Financial Advisers, who might work for a firm or a bank.

We do this because we feel that the role of a Financial Planner is actually distinct from that of the rest of the financial services profession.  By consequence, we believe that it is very difficult for you to determine the differences between the various services on offer – we would prefer for the role of a Financial Planner to be enshrined and protected, just like that of a Chartered Accountant or Solicitor.

Much of this information is cribbed from the Institute of Financial Planning website, which is aimed at promoting the Certified Financial Planner qualification and standards (to which we subscribe).

What is Financial Planning?
Financial Planning is the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy life and achieve financial security. Financial Planning is an effective way of ensuring you are fulfilling your life ambitions without having to worry about your finances.  Financial planning is about building towards financial independence, and is not focused on goals, income, assets, expenditure etc.  This process is not about product sales (although obviously, products would be used towards the end of the process to achieve the goals set).  Financial Planners tend to be fee-based because they charge for the creation and maintenance of a plan rather than selling a product.  This means you get what you pay for – advice rather than sales.

What is Financial Advice
Financial advice is what is supplied by the overwhelming majority of UK financial advisers.  This tends to be bespoke, targeted, transactional advice leading to a financial product sale.  As most financial advisers are commission based, they rely on selling you a product to get paid for their work.

1. What is their experience?
   Obviously, this is important; but as important is to ask their experience in dealing with situations similar to those faced by you.
2. What are their qualifications?
   This is more important than many financial advisers will lead you to believe.  Having advanced and specific qualifications shows a technical expertise, and a commitment to keeping up to date with the current trends.  After all, would you go to a doctor who only had a basic level of qualifications, and hadn’t kept up to date in 20 years?
3. What services do they offer?
   They should be able to easily define the services they offer to clients so you can decide if these are right for you.  You need to decide whether a comprehensive ongoing review is right for you, or you just want transactional advice on a one-off basis.
4. What is their advice process?
   How they go about delivering their service is also important – after all, you want to ensure that you will get a robust and consistent delivery of your service.  Our advice is to avoid advisers who cannot easily articulate their process.
5. How are they paid?
   This is important to your pocket, but also to know if you need to watch out for signs of bias.  You also need to know up-front the extent of your liabilities.  Our preference is for a fixed fee agreement, but many people prefer to operate on commission.
6. What is the typical cost of their services?
   This will help you to decide if the service is affordable and fits in with your expectations.  Ultimately, you want to avoid an open-ended commitment on your side.
7. Who else benefits from their recommendations?
   This is a question often missed.  You may have been referred to the adviser following a recommendation.  Does the introducer receive any payment from this arrangement?  We are aware of some local independent financial advisers who regularly pay out up to 50% of their income to professional introducers such as accountants.  While this is fine if the client agrees, we would be concerned that the client is not aware of the arrangement.  If you think about it, if the introducer receives payment (of such a large amount), your adviser will be forced to increase the fees or commission charged to you to achieve their profit margins.
8. Have they ever been disciplined by the Regulator?
   You would probably want to avoid advisers who have been sanctioned by their professional body, but you can actually check this out yourself by searching for the firm or adviser on the FSA Register.  All financial advisers must be on this register to be able to off you financial advice.  If they are not registered, then you are not covered (and the ‘adviser’ should be reported).

I turned on the news this morning to see a happy couple in front of the TV cameras having won a huge jackpot on the Euromillions.  This turned my thoughts back to a previous post on Sudden Wealth, which would probably describe the situation of the lucky winners today.

A psychologist was commenting on the effects of such a life-changing event, and in particular focused on issues of how the couple’s life would be different in many ways.  Obviously, most of their financial windfall will be positive, but he was cautionary about how the money would need to be managed, both from a financial planning perspective, and from an emotional standpoint too.

We think that people need to think about their financial goals at all points of their lives, but at times of sudden wealth financial strain can be quite severe.

For many people, this will not be as drastic as a huge lotto win.  But there are many other situations which can bring about a life-changing influx of money.  With this money comes the need to manage your finances.

Think about the following situations:

Sale of a business
You would hope to sell your business for a suitable sum, which after tax would help provide you with enough money to achieve your financial lifestyle needs.  No doubt you would need financial advice on when to actually sell (i.e. when you have enough to retire), but also how to manage the capital to generate a suitable income.

Inheritance
You may come into a significant sum of money which would need management both for capital and/or income.  It can be tempting to spend the windfall, when some sound financial planning will set you on a secure financial future. See our inheritance tax section on our website.

Divorce
This comes with issues for both sides.  Both parties will need to plan how their finances have changed, perhaps making up lost pension benefits or buying a new home.  Of course, if you receive pension benefits from your former spouse as part of the divorce you will need help to manage these new assets. See our leaflet on pensions and divorce.

Critical illness
If you have managed to claim on a critical illness policy then your life will have changed dramatically.  You will probably have a serious and debilitating condition, and would likely have to give up work.  The policy may have been set up to simply pay off the mortgage, but you might have also provided further benefits to help give you an income and/or make alterations to your home.  In any case, you would probably want to have some ongoing advice to ensure that this resource is best used.

Ultimate high earners
In this category might be sports stars or entertainers, who get paid significant sums for their talents; alternatively, directors or city workers might also receive bonuses as part of their package.  For some, they might want to seek a financial planner to help them organise their finances into a sound footing to avert the times ahead when the high income might dry up.

Thinking about those lucky Euromillions winners, I would say 3 things:

1. You should probably avoid the lotto – It could be you, but statistically, it probably won’t;
2. If I won the lottery, I definitely wouldn’t appear on TV spraying champagne everywhere;
3. I also wouldn’t be saying that my life would not change. With a sudden windfall, everything changes, and this needs careful management both from a financial and an emotional perspective.

Click here to download out leaflet on sudden wealth.  You may also be interested in our core services, which aim to help you plan your finances and manage your money.

OK, so here’s a Monday morning rant (of sorts); maybe only of interest to those in the financial planning community!

We’re in the business of providing financial advice.  As such, we run a pretty tight ship, having standardised procedures, so that everyone in the business knows their role and can contribute fully.  Michael Gerber would be pleased.  For clients, they get a consistent service, built around compliance procedures which ensure equitable treatment on all sides (Treating Customers Fairly, in FSA parlance).

However, we have a constant spectre looming over us in the form of constant change to financial regulations.  I am a fan of regulation because from a client’s point of view it serves a purpose to keep the business professional.  However, as a business owner, I sometimes tear my hair out.

This week we all read that the Financial Services Compensation Scheme is to bill all financial adviser firms lord knows how much each because of the failures of a few high profile companies.  These companies, by all accounts, seem to have been negligent in their attitude towards regulation and their customers.  As a result they collapsed spectacularly, leaving customers out of pocket.  Where this becomes our problem is that the compensation scheme steps in to protect consumers (quite rightly); the problem is in the application of the scheme.  Because the liabilities are so high, there is not enough in the compensation scheme fund to pay out to those affected.  What does this mean?  Well all the remaining firms who have been acting by prudent and fair conduct are thereby penalised.

The upshot of all this is that as a business owner I am now expecting a bill, of how much I don’t know.  This is unforeseeable, and very difficult to plan for.  What’s more, I will be expected to pay within a very short timeframe.  Personally, I don’t see this as a fair or equitable approach to the problem.  Of course, I recognise the validity of the overall scheme, but surely there must be a better way to plan for the future funding requirements of the scheme than to ask financial advisers simply to dip their collective hands in their pockets every time there is a crisis?

Add to this a possible change in Government later this year.  If the Tories win as is widely predicted, they have committed to a wholesale change to financial services regulation.  They say they will scrap the FSA, and replace it with their own pet body.  What does this mean for consumers?  Well, who knows?  I can tell you what it means to me as a business owner – I will be forced to spend countless hours and money adapting to the new rules.  Add to this the communication to clients, changing of literature etc, and we are talking about millions of pounds across the financial services industry.  Personally, I’m not sure that wholesale change is the way to go.  I would rather see a few tactical changes applied rather than starting the whole exercise from scratch.

Comments are welcome!

I took a call from a friend over the weekend looking for some free advice on buying a house.  He is in his 20s and is looking to buy his first home.  He has been with his partner to visit a local housing development.  What concerns me is the sharp tactics to which he is being exposed.

Now, obviously I wasn’t in the room with him, but it seems to me that there is a lot of sharp marketing going on here…

• They can afford the 2-bedroom option, but prefer the 3-bedroom house, which is probably slightly outside of their price band;
• They have a 10% deposit (just sufficient for a 1st time buyer);

They have now reserved a 3-bedroom house on the basis that ‘another couple’ are interested in it, and they have an offer on it, which will only be available for that weekend.  This sounds unlikely to me given that there are numerous developments, with a limited number of buyers in the current market.  They are being offered an incentive of an interest-free 15% loan, which is repayable in 10 years – on the basis that the house will go up in value over that period.  What’s more, they must use the developer’s pet mortgage broker to be eligible for that deal.

I tried to tell him that my theory is that all new builds are 30% more expensive to start with, to give them the room to negotiate on price, or to offer ‘incentives’ like this.  However, the buyer is more concerned with securing the dream house rather than the intricacies of their financial future.  The mortgage broker offered them a perfectly decent loan, but over a term of 35 years to make the monthly payments affordable.

My concerns:

• Why encourage them to buy a house that is stretching their budget if to do so they must pay over 35 years?
• Why should they be forced to use a broker they don’t want?
• What happens if something goes wrong?
  • To the housing market (the estate agent said their house will be worth more in 10 years time, so they can just remortgage to take on their extra debt)
  • To their income – their circumstances might dictate that the mortgage becomes unaffordable or they might not be able to afford to pay back the extra 15%
  • To their personal situation – what happens if they break up, have kids or want to move?  They still owe the 15% incentive

If you are reading this blog you are no doubt interested in financial planning and what it can do for your future financial prosperity.

Have you ever wanted to prepare your own comprehensive financial plan, to work towards your future financial independence without having to pay for it?

Well now you can!  We have just launched Your Financial Plan - this is a free resource designed to give you all the tools you could need to be able to prepare your own comprehensive financial plan.

Take a look, and if you like what you see, sign up to receive the free materials.  You can unsubscribe at any time.

5 ways To measure risk in investment portfolios: http://viigo.im/2fQH

This is an interesting article which explains some of the technical measures which we can use to assess risk in your investment portfolios.  If you are just looking at past performance you could find yourself taking excess risk with you money, or worse, paying for fund management from a closest tracker fund.

Standard Life holds with profits bonus rates. If you hold such funds your chances of growth are restricted: http://viigo.im/2fQD

We think that these type of funds are outdated since they are difficult to understand for consumers, and are also difficult to value.