Is it time to revisit SIPP borrowing limits?
SIPPs have long been associated with the direct purchase of commercial property. In fact if you were to ask those who’ve been involved with SIPPs for more than a decade, a reasonable number might say a pension scheme wasn’t truly a SIPP unless it offered the option of direct access to commercial property.
Whilst this isn’t a view I’d support, I’m long enough in the tooth to remember the days when a significant minority of SIPPs were set up to purchase commercial property, before the growth in popularity of online investment platforms led to the establishment of large numbers of stock market-based SIPPs.
The explosion of growth of online platforms wasn’t the only factor which led to property purchase forming a less significant part of the SIPP market. Changes to the rules governing property purchase borrowing in 2006 made it much harder for many to come up with the funds required to buy a property.
Before 2006 SIPPs were allowed to borrow up to 75% of the value of a commercial property, so someone with pension funds worth £100,000 could potentially purchase a property approaching £400,000 in value.
From 2006, the limit on SIPP borrowing was reduced to 50% of the value of the pension scheme. So individuals with £100,000 in their SIPP suddenly saw their capacity to buy a property reduced from approaching £400,000 to £150,000. Unsurprisingly this led to a huge surge in property purchases just before the limits changed in 2006 under the old, more generous, limits.
A few factors are now making me wonder whether re-visiting this limit might be a good idea.
Firstly, I suspect it’s now largely been forgotten that the borrowing limit was reduced in anticipation of residential property purchase being allowed under SIPPs, amid fears that the higher borrowing limit could overheat the residential market and expose investors to too high a risk. Although it didn’t take effect until 2006, the reduced borrowing limit was actually set a couple of years earlier, well before the December 2005 decision to close off the option of SIPPs buying residential property. If the lower limit was primarily introduced to limit potential problems linked to an asset class that was never available to SIPPs, is it needed?
Secondly, there’s no real evidence of the higher borrowing limit causing issues in relation to commercial property purchases. SIPPs had been able to borrow at the old limits for many years before 2006, we then had the rush in purchases shortly before the limits changed, and this was followed within a couple of years by a catastrophic economic event that had a significant impact on commercial property, but this wasn’t followed by SIPPs and SSASs failing through overexposure to the market. If the economic crash of 2008 didn’t cause problems for those who’d borrowed under the old limits, should we consider reverting to them?
Finally, whilst the impact of Brexit on the commercial property market is a matter of debate, with words like ‘soft landing’ being bandied about and an expectation that investment from overseas will continue to keep the market relatively buoyant, it strikes me that relaxing the borrowing limits might allow a greater number of SIPP investors to enter the market at a time when prices could be attractive. Also, with SIPPs often used to purchase the business premises of the SIPP member themselves as an efficient means of business funding, more relaxed borrowing limits may also help there.
Had it not been for the explosion in numbers of online SIPPs I suspect calls for a relaxation in borrowing limits would have been louder. Now, with the difficulties faced by bespoke providers evidenced by consolidation in the SIPP market, perhaps now is the time to reconsider those limits.