More people are using the new personal pension rules to invest in property - and owning your own hotel room in your pension fund is one idea that has caught on.
Many people set up Self-Invested Personal Pensions (SIPPs) two years ago because they wanted to invest in residential property. But the Treasury changed its mind and banned this type of investment.
Some people have got round the rules by investing in offshore funds that in turn invest in UK residential property, but I haven’t been impressed by the credentials of the people offering such schemes, which also carry high costs.
Our best buys help you find the right SIPPGuestinvest claim you can get 6% on your moneyA more interesting option is to buy a hotel room for your pension fund. Since hotels are ‘commercial’ rather than residential property, they’re a permissible investment for pension funds. But there are grey areas. If the room has its own cooking facilities, for instance, it may be classified as an apartment, which is residential and isn’t permitted.
Two operators with serious schemes are Guestinvest and freedomsipp. Guestinvest have one operating one hotel in London and are building two more where rooms are owned by individual investors and managed by Guestinvest on a 50-50 revenue sharing deal.
Guestinvest claims that even paying an initial £200,000 to £385,000 for a room, investors can get a return of 6% on their money. Now Aegon Scottish Equitable is letting those who have money in its SIPP buy Guestinvest rooms. Other SIPPs with independent trustees may also allow this, but most low-cost ‘package’ SIPPs won’t.
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Arrange a free SIPP consultation with an adviser hereWatch out for the charges with any schemeFreedomsipp had a scheme to invest in rooms in French hotels starting at £150,000, and though its current scheme has sold out it will probably be back with a new one before long. Its own charges are on the high side - £390 set-up and £890 a year plus transaction costs (Aegon’s are £300 and £500 respectively), but a ‘bespoke’ as opposed to packaged SIPP is more expensive because you’re getting personal service and, hopefully, property expertise.
Under the new rules, you may borrow up to 50% of the net value of your fund. That doesn’t mean you can borrow £100,000 to buy a £200,000 room. It means that if you have £100,000 in your fund you can borrow £50,000. So these schemes are aimed at those with substantial pension funds.
Before you get too fired up, the rules say that if you stay in your own room you must pay a commercial rate - otherwise you will face a massive tax penalty - so neither you nor members of your family can benefit from using the room. On the other hand, if both you and your mate Brian were to buy a room and each were to allow the other to use their room… but in fact, given the basis on which the schemes work, you only get the promised returns if you leave it to the operators to rent the room for the most they can get all the time, so it doesn’t really make sense to try and work a wheeze like this.
Our recommendations will help you find the right SIPPBig risks to the prosperity of London’s hotel landI must also signal a doubt about the longer-term returns. After 9/11, transatlantic flying ground to a halt and London hotel occupancy plummeted. So terrorist events elsewhere may knock your returns.
And London itself remains one of international terrorists’ top targets. In the run-up to the Olympics, it’s possible we’ll see an excess of hotel capacity created that results in problems for hotel operators after the crowds have gone home.
Most advisers would say that if you ‘only’ have £200,000 in your pension fund you should be spreading it across a range of assets, not just buying one room in one hotel in one city in one country. But if you have stacks of capital in other investments, then you can feel more comfortable about taking a bit more risk with your SIPP.
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Arrange a free SIPP consultation with an adviser here
