A self-invested personal pension (SIPP) can be an attractive option for saving for retirement and is one that is popular with company directors. Under a SIPP, you can choose and manage your investments yourself, or you appoint a financial adviser to manage a SIPP on your behalf. The range of investments that can be held in a SIPP is wide and includes commercial (but not residential) property.

Financial advice should be sought before setting up a SIPP.

SIPPs and commercial property

If you operate your business from commercial premises, it can be beneficial to purchase the premises through a SIPP and rent them to the company. While the SIPP must charge the company rent at a commercial rate, the rent paid goes into your pension pot rather than being lost to a third party. The company is still able to deduct the rent when working out its taxable profit.

The rent paid into the SIPP does not count towards the annual allowance, leaving this available to shelter individual and employer contributions to the SIPP. This is also a significant advantage if you have chosen to flexibly access your pension pot on reaching age 55.

Flexible access and the MPAA

The pension tax rules allow an individual to access pension savings in a money purchase pension on reaching age 55. You may choose to take your tax-free lump sum at this point. The amount that can be taken tax-free is equal to 25% of the pension pot at that time, capped at £268,275 from 6 April 2023. Once the tax-free lump sum has been taken, further withdrawals are taxed at your marginal rate of tax. If rather than taking the full tax-free lump sum, you make smaller withdrawals, 25% is tax-free and the balance taxed at your marginal rate of tax.

To prevent recycling of contributions, the annual allowance is reduced once a pension pot has been flexibly accessed and instead of the full annual allowance, tax-relieved contributions are capped by the money purchase annual allowance (MPAA), which is set at £10,000 for 2023/24.

It is here that rental payments to the SIPP once again come into their own as they do not count towards the MPAA, providing the opportunity to rebuild the pot at a rate of more than £10,000 a year (subject to the rent being set at a commercial level).

Beware missed rental payments

The SIPP is not a sympathetic landlord and care should be taken not to miss rental payments as if rent remains unpaid, the unpaid rent is treated as an unauthorised payment, triggering the unauthorised payments tax charge. This can be as much as 55% of the payment.