Can a SIPP borrow money?

30/03/2020

Can a SIPP borrow money? At first it seems a paradoxical question – the purpose of a pension is to accumulate wealth for your retirement, not to take on debt – however, it is possible to borrow money within a SIPP. The value of the pension can be used as leverage in order to allow a larger investment, typically a Commercial Property purchase, to be facilitated. It allows you to be far more aspirational with your investments.

How much can you borrow from a SIPP?

You can borrow up to 50% of the value of your SIPP. For example, if your pension has a value of £300,000 you will be able to borrow up to £150,000, to give £450,000 for investment.

This assumes that your SIPP has no outstanding borrowing. If there is borrowing in place the SIPP can borrow 50% of the net value less any outstanding loans. For example, if your SIPP has a value of £300,000 with existing borrowing of £50,000, the scheme has a net value of £250,000. The borrowing will therefore be set at 50% of £250,000, which is £125,000 minus the £50,000 you already hold.  The Scheme can therefore borrow an additional £75,000.

What can you use the borrowed funds for?

You can use the borrowed funds for any legitimate and allowable investment designed to benefit your pension scheme. SIPP borrowing is most typically used to fund the purchase of Commercial Property which is then rented to either your own business or to a third party at market rates under lease. Borrowing can also be raised to carry out work on a property already held in a SIPP.

The rental income lands in the SIPP tax free and will service the mortgage repayments.

>> Buying commercial property in a SIPP

>> Can I invest my SIPP in my own company?

Is it cost-effective to borrow from a SIPP?

Raising finance in your SIPP is cost effective and the rates currently on offer from lenders are reflective of the prevailing low interest rate environment. Arrangement and associated professional fees are competitive too although the fixed fee nature of some fees make the borrowing relatively more cost effective as the level increases.

A more important point to consider is that taking on borrowing in your SIPP does increase the risk somewhat. The pension scheme remains obliged to make the mortgage payment each month and therefore you need to consider how this will be done. Typically, the tenant of the Commercial Property will be paying the rent and the standard risks around this apply in terms of void periods and quality of tenant.

Borrowing can be a relatively painless way to free up capital; however, you must remember that the purpose of a SIPP is to provide you with a secure financial future. Care needs given over the decision to borrow and the investment which will be made. Your broader circumstances and objectives should be considered.

Here at Prydis we have a well experienced team of advisers and support staff with a high degree of knowledge of SIPPs. Our expertise in Tax, wealth management and retirement planning helps forward-thinking investors make confident, balanced decisions for their financial future. For a free no-obligation initial consultation, just get in touch. We are happy to talk to you either over the phone or in one of our UK offices.

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James Priday

This article was written by James Priday

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