Buying Land with a Pension

Before I begin let’s get the disclaimer out of the way: I’m not a financial advisor nor am I ‘regulated by the Financial Services Authority’ and your risk profile, circumstances, motivations & world view are likely to be totally different to mine. Do your own research. DO NOT take the following article to be in any way competent financial advice. It’s not. If it sparks an interest in you then go and speak to a professional because I am certainly not one in these matters. You read and act on the following at your own risk. You have been warned.

Audience and motivations

This article isn’t aimed at investors in the normal sense of the word. People with enough money to buy chunks of land off-plan for long-term capital growth or tax planning (avoidance?) reasons will likely have well paid advisers to do the work for them. Instead the aim of this article is to act as a how-to for individuals or groups like-minded people looking to free up capital that they had previously thought to be locked away and to convert it into something tangible that they can use to start planning for their future(s). This post is also very focused on a single issue. Owning a piece of land won’t suddenly make you resilient or self-sufficient (the latter being a myth of course). For a start you’re still going to have to roll your sleeves up and you’ll still be wanting a tight community around you.

Background

Over the past 3 years we’ve been actively looking to buy some land of our own to, amongst other things, grow food, fuel and have a place (and the space) to try some of our ideas out. Unfortunately for us and for everyone else, land is expensive, really expensive, and as people often quip ‘they are not making it any more’, so its price is generally on the rise, recession or no recession.

It’s not within the scope of this post for me to delve any deeper into the historical issues surrounding land ownership (or more accurately theft) in this country or to discuss the arguably unenlightened aspects of our planning laws that make it insanely difficult for you to live on your own piece of land as a subsistence farmer one of many reasons for the massively inflated prices of land that also come with residential planning permission. But I would say that if this is a subject that interests you then Simon Fairlie’s A Short History of Enclosure would be a really good place to start.

During the period of searching that I mention above we tried out a few different communal land sharing options including a 6 month stint in an intentional community as well as getting quite far down the line setting up a housing co-op but each time something ended up not working out. All the time our sense of urgency kept increasing. Tick, tock, the clock was ticking away, time was passing and we really wanted to get planting. So, we were left facing the decision of using our limited money to put towards a mortgaged house with a small garden or to buy some land with that deposit money and rent nearby for ever as we’d be unlikely to ever get permission to live on it.

It was this stark choice that gave me the motivation to act upon a hunch I’d had previously about pensions. I already knew about self invested pensions but they were not of interest to me as I don’t have the inclination to play money markets and neither do I have any confidence in the stability of financial system that they belong to. So much so that the few modest pension pots that we had built up as a husband and wife over the previous 15 years of working had been pulled out of stocks and funds since just before the crash of 2007; they were sitting there parked in effectively cash accounts, growing little and in our eyes being extremely vulnerable. I got to thinking that if I was able to buy chunks of companies or virtual funds with my pension could I buy some real land? Land that I could walk on, land to plant trees on, land that when I’m too old to convert my labour into money I could continue to receive an income stream from?

Well it turns out the answer is yes, mostly, and we’ve recently gone ahead and put those plans into action, getting a pension set-up and completing on the purchase of a chunk of mixed agricultural land and woodland. When we’ve talked with others about what we’ve done the questions have started flowing so I decided to put this post together mainly to point people at when they ask us how we did it.

Pension Types

There are two types of pension that can be used to buy land:

1. SIPP (Self Invested Personal Pension)
2. SSAS (Small Self Administered Scheme)

As I understand it (scroll to the top, read the disclaimer) a SIPP is for an individual. They are much more commonplace with lots of brokerage websites and stock apps South Africa has, offering them to buy stocks and shares with. From what I can gather it’s definitely possible to buy ‘commercial property’ through a SIPP too. If this is your preferred route then you’ll need to look into it more on your own as we didn’t go down that route, we set up a SSAS instead. If you do go with a SIPP you’ll probably want to skip ahead to the ‘what you can and can’t do section’ as the next bits won’t apply to you. Broadly speaking a SSAS is a pension scheme set up for the benefit of the directors of a business. We’d recently set-up a limited company to act as a commercial umbrella for our various business ideas, both active and planned, with the both of us as directors and equal shareholders. The important thing for us with a SSAS is that we were able to then combine our four (two each) existing pension pots into the one fund in order to have enough to buy something with.

Setting it up

I spoke to five different SSAS providers and ended up going with SSAS Practitioner.com to set-up our scheme. They just ‘made it work’ guiding us through the  inordinate amounts of paperwork, chasing both us and the existing pension providers to sign the relevant forms, telling us what we could and couldn’t do and generally dealing with all of the correspondence involved to get our scheme set-up. They were also the cheapest in terms of fees as well as being the most helpful, which was a nice combination. (Note: that’s not an affiliate link and I don’t receive a kick-back, other firms can also provide this service). Luckily we’d thought ahead and were doing this all with no target purchase to add to the stress. One of the pension providers dragged their heels a bit to transfer the money and at least one set of forms got lost so including these delays I reckon we had the scheme set-up and a new bank account belonging to the scheme with all of the money in it within 8 weeks. It’s worth noting that the SSAS provider is likely to get you to sign a disclaimer saying you’ve received financial advice elsewhere. They will be efficient in getting the scheme set-up but the decision about whether it’s a good idea or not is for you to make based upon the professional advice that you’ve received elsewhere.

Charges

As the SSAS is a company pension scheme it needs to be attached to a business. We already had a business  but if you were doing it from scratch then getting a Ltd Company set-up on line is really easy and you should get change from £50. On top of that there are the annual company running costs which is a Companies Annual Return (a simple form to fill out and £15 payable to Co. House) as well as filling of annual accounts. The latter can be quite expensive and I’d budget £1K if you’re using an accountant and the business is actually trading but if all it’s doing is being the umbrella for the pension then it should be pretty simple to do the annual accounts yourself.

All of this will need to be set-up in advance and you’ll be paying set-up and ongoing costs through the businesses own funds. When you buy the land there will be legal costs, I’d estimate £750 for this, to include the searches and conveyancing. The pension or attached business can pay for this.

Surveyor. I’ll explain why below but you’ll need to use a chartered suyveyor to value the land as well as a lawyer to draw you up a business lease. Erring on the side of caution I’d estimate a further £1500 for this but would hope to get it done for less. The pension or attached business can pay for this.

The SSAS Provider will charge you to get the scheme set-up and then charge an ongoing annual fee to administer the scheme. The firm we used charges £800 +VAT with no hidden charges including per new acquisition (you particularly need to check this with yours). The pension or attached business can pay for this.

As a ball park figure, assuming you’re already a trading business, expect to pay around £2.5K to be set-up including the transactional costs of your first purchase and the business lease, if you’re willing to do lots of the legwork yourself then drop that down to £1,500. Ongoing costs estimate around £1K annually. Both of these figures can be paid out of the pension’s funds but we decided for the set-up to get the attached business to pay for it.

If £1K per year sounds a lot then I suggest you look at the charges being applied to your current pension. I’ll bet you’re paying at least 1%-2% so on a pot of £50K you’re looking at £500 – £1k annually.

What you can and can’t do

The next bit is the most important. When your pension buys some land YOU DO NOT OWN IT. You are simply a trustee of a financial vehicle recognised by HMRC as a pension scheme and it is this entity that owns the land, not you. You can’t just turn up, tether your goat, pop up a yurt up, get a fire going and break out the ukulele. Well actually you can if you like but you’ll need to pay rent for the privilege and as you are ‘connected’ to the pension you need to make pretty darn sure that whatever you’re doing on the land you’re paying market rate for it. If you don’t and you get caught by HMRC then they’ll slam you with a big tax bill.

You also need to understand that the pension cannot trade. It’s there to earn an income from its assets either as rent from them being utilised or  from their appreciating in value. If you do want to do anything commercially on the land then you’ll need a commercial lease that you pay to the pension. This lease has to be at market rates. The pension can’t, for example, directly sell firewood or rent its land out to put on a festival. A leaseholder would need to be involved, paying a rent to the pension for the privilege of having the option to do these things.

What we’re planning to do

Given the above we’re going to split the land into two chunks. The first part – a few acres – we’re going to buy outright with money from our savings at a market valuation set by a chartered surveyor. We can then do whatever we wish on this land within the usual legal frameworks. Our plans are simply to plant some food crops and get a small roundwood barn up for shelter as well as water and solar collection.  Update: We decided against buying that small chunk mainly because the surveyor placed a pretty high value on it, their rationale being that a smaller chunk would fetch a higher value, much more than we were able/willing to pay. Update 2 (July 2012): We decided to sell it to someone else. The pension had low funds so this will give it some reserves to cashflow the tree planting and maintenance. The rest we’re going to have our business lease from the pension at a rent set by the same surveyor to cover any business activity. We will set-up a nature reserve in the middle, it’s already teeming with life compared to the monoculture desert around it and we’ll look to derive an income from using the land in a multitude of ways as per our businesses longer-term vision. This leased part of land also includes some woodland, our lease will include commercial use of the standing timber. We will also have some of the leased land planted up under existing grants. The pension will be the beneficiary of the grant funds and own the growing asset. As a leaseholder our lease amount will need to reflect the fact that when the timber is ready for coppicing in – say – 10/15 years time that we’ll be deriving a greater commercial yield from the land and so we’ll likely be paying more back to the pension.

As a business we will also supply land management services back to the pension, maintaining its asset for a fee. This land management could include fixing boundary fencing, creating tracks or clearing ditches. To ensure we’re totally squeaky clean should HMRC investigate us we’ll make sure we have a 3rd party quote to give us a market rate benchmark per job. We will also need to ensure that any billable work that we do doesn’t provide a benefit to the leaseholder – for example a new track to make timber extraction easier – if so then the lease will need to be changed to reflect this new benefit.

One option we’re investigating to make the lease less complicated is to take the majority of the liability for maintaining and improving the asset within the lease but then pay a much lower rent. It’ll depend what the difference is between the two rates whether we go for this option. This is all a work in progress so a decision has not been made yet.

Update 3: (Nov 2012): We didn’t sell it, too much hassle. We also don’t have a lease yet as the set-up costs were quite large (£1k for survey/legals) and there is currently zero income coming from the land. When we’re ready to start trading (I intend to kick of some charcoal production in 2013) then we will get that lease and hopefully the income will cover the lease costs.

Common Questions

Can I buy woodland with my pension?

Yes. You can buy ‘commercial property’ with the pension, which would include farmland or woodland. You can also buy other asset classes such as stocks and shares. You cannot buy residential property, works of art, wine or antiques.

Can I live on my pension’s land?

No although one workaround that’s probably too unwieldy to bother with might be to have a residence being owned by many pension schemes where yours is only owning a small share of it.

Can my pension borrow money?

Yes! Up to 50% of its value.

What happens if I’ve put more in that other scheme members?

This is all accounted for with an annual valuation. If you put in 75% and the other member puts in 25% then the growth in value and any share of income is attributed accordingly. At retirement you get your share. You can also continue to pay into the scheme and this will alter your share accordingly.

What happens when I retire?

You can retire from age 55  onwards. At the point of retirement you can take 25% of – your share of – the ‘fund’ as a tax-free lump sum with the rest being taken in a number of different ways far too confusing to mention here. Importantly the rules have changed that mean you are no longer compelled to the sell the pension’s assets to fund the purchase of an annuity.

As we understand it (see disclaimer) if your fund’s assets are illiquid (read: land) then it would not be unreasonable to mortgage the asset to start providing benefits to the members. Another option would be to have new members to come in and start paying in. Your kids, say. The new members’ contributions could be paying towards the retired members’ benefits.

It’s also worth pointing out that pension rules keep changing and it may be that in the future land investments in a pension become a really attractive option or equally they could become really unattractive. This is one of the serious risks of going off-piste with your investment choice. As we’re husband and wife the retirement thing didn’t seem a big deal. If you’re a group then this probably wants a huge degree more due-diligence. Our plan is that by retirement age there will be industry enough on the land for us to derive a small income without needing to sell it.

Wouldn’t you make more money with index linked investments and compound interest?

Who knows? Possibly. This is the personal choice aspect and it depends whether you’re confident that the business as usual and infinite economic growth paradigm is going to keep on going. We’ve decided that we want a tangible asset and more importantly we want to get utility from that asset now. There is a certain amount of sitting on the fence, though, so we’ll take great care to ensure the scheme does increase in value and if over time it has some spare cash then we may use that for other investments.

I’ve got a really good public sector/final salary (or whatever) pension scheme with excellent prospects, should I switch?

Almost certainly not. But as I say, I’m not providing financial advice so do your own research.

Summary

As a couple we had some money tied up in a few pension pots and we already had a major desire to purchase land. Getting some land with the pension works for us as we’ve still got our savings to put towards a home or building plot near to our land when one becomes available that is within our price range. We already had the business set-up and a bunch of land based business ideas that will one day hopefully generate enough income to at least pay for the commercial lease. Long term we’re aiming for the land to provide us with a sustainable income into retirement, and income that is not so directly exposed to the inherent risks of the current financial system. We are extremely motivated to be good stewards of the land for all of the current residents, flora and fauna alike. It’s a perfect investment choice for us given our circumstances and world view and we’re delighted that we’ve managed to pull it off.