Using commercial property as a pension

Low interest rates, gilt yields, annuity rates, and stock market uncertainty continue to put pressure on pension schemes, making property as a pension – particularly commercial – a more viable option.

In retirement, many people don’t like the potential volatility of stock markets or being stuck with low annuity rates or almost non-existent returns on cash based assets, but they still need protection against inflation and receive a sustainable income. Commercial property as a pension could therefore be a good idea, as it is in a way benchmarked to the economy, interest rates, and inflation, so provided you choose the right commercial property, it could be the best investment in retirement.

There are also useful tax reliefs available with this asset class, including the usual income tax and corporation tax relief on contributions, plus capital gains tax-free growth and no taxes on rental income to the pension fund. Furthermore, company owners can buy their own premises in a pension fund with the company as the tenant.

The company pays rents to the fund without any annual allowance restrictions and with the bonus that those rents are offset to corporation tax. In addition, the tenancy agreement will be a Fully Repairing and Insuring lease (FRI), which means the company funds any repairs etc. So, it makes perfect sense for business owners to consider commercial property investment within their pension arrangements which will typically be small self-administered schemes (SSAS) and self-invested personal pension (SIPP). Importantly you can also borrow up to 50% of the fund value as a pension mortgage

With commercial rental yields on tertiary property at about 8 per cent to 10 per cent a year, and a typical mortgage rate around 4% you can gear the asset to gear your returns.

Clearly no one should go out and buy the first commercial property they find. There are many factors to take into account when assessing a suitable purchase and professional advice should be sought at outset.

Many investors already have a residential investment property (buy to let), so the progression to commercial property is quite a natural one, particularly with a tougher tax regime on residential investment properties now in place.

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