For as long as there have been self directed pensions, there have been advantages to be had for investors that pool their resources. Joining together with other investors has always given access to assets that would be out of reach to the lone investor, based on the resources available through their pension fund.
That’s one of the very clear pros of SSASs and (some) SIPPs over other pension arrangements. And as much of the pensions market, including the vast majority of SIPPs for that matter, becomes increasingly vanilla, or to give it the more politically correct term – On Platform, Common Investment Funds (CIF) will become even more attractive to those with a will to direct their own investments.
In fact the rewards are potentially so much greater than you can ever really hope to get from most other arrangements that at first it’s hard to define any disadvantages that come through forming a CIF for say the purchase of a commercial property.
There are some though, and a good Adviser will know of them and ensure their clients understand the implications of them.
In a recent blog for Investment Sense, James Randall of IPM talked about the Four Ds of Joint SIPP property purchase as being:
- Death
- Departure
- Drawdown
- Divorce
These are not just considerations for SIPPs and so we will look at these same risk areas, but note that they apply to any type of asset, purchased by any group of people via any form of CIF.
So, these Four D’s and the risks they represent: in a nut shell, certain events, should they occur, will require an amount of cash to be available to comply with relevant legislation. If the fund expected to produce that cash does not have it, perhaps because it is largely made up of capital in illiquid assets (such as property), it follows that it is highly likely that asset will need to be sold to allow the fund to meet its commitments.
Easy peasy if the asset is something that can be transformed into cash relatively swiftly, but what if the asset, as proposed above, is a property? Selling commercial property, as everyone knows or can guess, is far from an overnight process. In any event, even if the members of a CIF do have liquid assets, it’s unlikely they will do the job on their own.
The other thing is of course that it’s not just time consuming but perhaps more importantly, it’s unlikely to reflect the wishes of the majority of investors within the CIF, who are otherwise unaffected by the event that acts as a trigger.
For example, let’s say there are three Company Directors who set up a SSAS sponsored by their ltd company. At the time they establish their SSAS, one of the Directors is 12 years off retirement and the others are 20 and 25 years off retirement respectively.
Having transferred in funds from existing arrangements, the three Directors (and Scheme Members), pool their amalgamated funds and along with a little borrowing, they buy their company premises with their SSAS. Over the years the SSAS pays the borrowing down with the rental income and the capital value of the property grows. Everyone is happy; the Directors are still the beneficial owners, their fund owns a very good asset providing good returns, the company balance sheet is far healthier and the bank have a tax exempt borrower making them more comfortable about their security. Nice.
In all likelihood, the three Members as the Beneficial Owners, will own the property in different percentages. But unless these Members have also invested heavily in assets easily realisable such as cash on deposit (not that likely at the moment), then at the point the oldest Member looks to retire, there simply won’t be the cash available to pay the Pension Commencement Lump Sum. Oh dear.
This is where the Trustees will be required to take the kind of action that disrupts this good thing they’ve got going on. One way or another, liquidity has to be found and unless this can be covered by additional borrowing, it’s likely to leave no option but to sell the whole property, whether the Members who still have years to go before they retire want to or not.
Whilst the trigger event differs, the outcome, or potential outcome, is the same through all of these four ‘D’s:
Death Benefits must be paid out within two years of the date of death and could result in the entire value of the deceased’s fund being payable as a lump sum to their beneficiary and with 25% of a Members fund being available as Pension Commencement Lump Sum anyway, any group of investors linked by a CIF could well face the need to sell an asset or assets within that timeframe to meet these types of pension benefit liability.
As much as you like to think no one goes into business with a person or persons that they are pretty sure they can’t work with, relationships break down all the time and if this happens when those involved are in a CIF, that fund is most likely going to need to be broken up to allow the investors to go their separate ways.
Divorce is no different though it is happily less common (quite incredibly). If the Provider receives a Pension Sharing Court Order specifying the amount due to the relevant spouse and then, even worse, this is to be paid via a transfer out to a new arrangement, this is likely to lead to the same unwished for scenario whereby the asset or assets in the CIF need to be made liquid.
We’ve talked about these Four D’s as being pitfalls of common investment funds but it’s important to note that even if they do crop up, they don’t automatically have to be a problem, at least not an insurmountable or unbearable one. Careful, active management of any of these situations will ensure that even though no one wanted them and is unlikely to relish what action needs to be taken, as long as all parties approach the situation honestly, openly and collaboratively, it needn’t leave any party disadvantaged.
In any event, it’s always wise to discuss issues as early as possible with Advisers and in turn for Advisers to discuss the issues, or potential issues with the Provider.
One final point of interest to note is that here at PSG we have specialist structures to deal with joint investments which among other things, help to efficiently mitigate the pitfalls of common investment funds and negate the potential problems of these Four D’s. If you are an Adviser with a client or clients in, or looking to establish, a CIF then depending on the size of the fund in question, it might be worth your while asking us a little bit more about this.
