Page last updated at 22:14 GMT, Thursday, 30 June 2005 23:14 UK

Ask the expert: Pensions and property

Mark Stopard
This week's expert is Mark Stopard

BBC News Ask the Expert column gives readers a chance to have their financial questions answered.

This week's expert is Mark Stopard, head of pensions at financial advisers Origen.

Barry Monks wants to know if new pension rules, due to be introduced next April, will allow him to buy a holiday home in Spain and put it into his pension pot.

Mark Stopard writes:

Very significant changes are being made to the pension system from April 2006.

The changes apply to the contributions that can be made, the benefits that can be drawn and as you say, the rules on how you can invest your pension fund.

In the past, holding residential property in a pension fund was a complete no-no.

The pension fund may be able to borrow to help finance a property purchase

However, this restriction will no longer apply from 6 April 2006. This has already aroused a lot of interest because residential property is so popular.

Let us start by looking at how the rules might work.

First steps

The first requirement will be to take out a Self Invested Personal Pension (SIPP).

The next step would be to collect together sufficient funds within the pension scheme to be able to purchase the property.

The new pension rules will allow a personal contribution of 100% of your earnings in any tax year, considerably more than the present system.

Funds may also be transferred to your SIPP from other pensions that you may have.


The pension fund may also be able to borrow to help finance a property purchase.

The maximum you can borrow under the new rules is 50% of the gross value of the fund.

Therefore if you had your eye on a property worth 120,000 and your accumulated fund was 80,000, you could borrow the 40,000 required to make up the difference.

You either need to rent the property out or make regular contributions to the pension to at least cover the interest payments on the loan.

The principal advantage of using a pension fund for second homes in this way is that the eventual sale would escape a potential 40% UK capital gains tax charge on any gain on the property.

In addition, funding and borrowing costs are effectively made from gross income rather than net income because of the generous tax relief on pension contributions.

Having your entire pension in a second home is extremely risky. If things go badly wrong then it is your future security that will suffer
There would also be no UK income tax on the rent from any lettings.

Legal problems

If all this sounds too good to be true then there are some significant provisos you must bear in mind.

Under the new system you will have to pay your pension fund a full market rent if you stay in the property.

There will also be issues that you need to check out locally in the country you intend buying in.

The local tax treatment is one issue to look into. Another is the legal mechanics.

The legal system in Spain has a problem with the underlying legal structure of a UK pension scheme, which means that it is not possible to complete the legal process of transferring a property into it.

So, as far as buying a property in Spain and putting it into your pension pot is concerned, you may be out of luck.

It is very important not to lose sight of the main purpose of a pension scheme, which is to provide income in retirement.

Remember that your pension fund is likely to need to sell the property when you retire and need to draw your pension.

Also, you should diversify your pension investments.

Having your entire pension in a second home is extremely risky. If things go badly wrong then it is your future security that will suffer.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

This story was written under the BBC's editorial guidelines, a full version can be found at



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