Guy Gowing on the abolition of the lifetime cap on pension investments.
Most people think of a pension as a passive savings account for their retirement. It may be invested in things offering capital growth and income, but until relatively recently those decisions were generally made either by financial advisers or pension companies.
But over the past 20 years, we have seen the emergence of the self-invested pension plan (SIPP) and the self-administered scheme (SAS). These have allowed people to take back control of their pension funds and be more proactive in deciding where they are invested.
SIPPs are a popular vehicle for investing in commercial property. Often this involves directors of companies holding the freehold to their business premises in their pension, but in more recent years we have seen commercial property-based SIPPs diversifying into more speculative property investment.
Alongside stocks and shares, property is one of the few investment classes with the potential to offer both capital growth and an annual return.
The growth in demand for commercial property has led to SIPPs approaching the lifetime allowance cap for pensions, effectively barring investors from putting any more into the funds. Investments coupled with decent rental yields and capital growth can bring a fund perilously close to the cap, which currently stands at £1.07 million.
Chancellor Jeremy Hunt’s announcement in the Budget that he is to abolish the lifetime cap altogether from April 5 will be welcome news to many commercial property investors. Those close to the cap will be able to build up their fund at the increased rate of £60,000 per year (in addition to any growth in investments already made), opening up the opportunity to take advantage of the buoyant market, especially in industrial and warehousing.
Some have cautioned against getting too carried away. Shadow chancellor Rachel Reeves has indicated that, should they come to power, Labour will reverse Hunt’s decision. Although Labour would re-impose a cap, it’s likely that it would be at a higher level than the one which has been abolished – perhaps as high as the £1.5 million level set when George Osborne first introduced the idea of a lifetime allowance back in 2006.
As ever, investing requires expert advice, and doing so in commercial property needs a deep knowledge of the market. Even with the new deregulation, compliance is still a complex matter.
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