Pensions in Property Guide

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1 Content 1 Introduction 2 Novia SIPP and Direct Commercial Property 3 Fund Manager 4 The PHG Asset and Property Management Service 5 The Property Purchase Process 5.1 Assessing the suitability of the property 5.2 Establishing the Fund 5.3 Purchasing the Property 6 Property Management and Reporting 7 Fund Management and Reporting 8 Selling the Property Please refer to the Novia Financial Key Features Document and the Property Fee Schedule for further information about aims, risks and charges. How to contact us Call Client Services Visit our website us clientservices@novia-financial.co.uk Write to us Novia Financial plc Cambridge House Henry Street Bath BA1 1JS 1. Introduction Novia SIPP has been developed to enable individuals who want to self-invest their pension to do so using the full range of permissible investments, including commercial property. Novia Financial have partnered with PHG Asset Management as fund manager to make this process as easy as possible. Commercial property has become an increasingly attractive asset for Investors to hold within their pension fund. Having control over this investment class through direct investment in property is often the reason that clients choose to self invest their pension. Direct investment of a pension in commercial property requires a comprehensive understanding of both commercial property and pension legislation to do it efficiently and effectively. This guide explains how Novia Financial works to match their technical expertise in pension with PHG Asset Management s expertise in commercial property to develop Novia SIPP, a solution that works for clients. The structure of a pension fund means that the title for direct property investments and all associated responsibilities of a property owner rest with the trustee of the pension fund. The Investor has a beneficial interest in the property investment made by the trustee. Business Rules These are the minimum propositional criteria under which the addition of a commercial property via this arrangement will be permitted:

2 The Property will be of a commercial nature > It will have no mortgages or encumbrances > Freehold and Leasehold property will be considered provided that there are more than 70 years left on any lease. If less than 70 years these will be reviewed on a case by case basis > The property must be in Great Britain > Owner occupied property only > Multiple Investors of Novia SIPP permitted as long as all occupiers (maximum of three tenancy agreements) > No tenants other than the firm of the SIPP Investor > Cash for the transfer of initial 10k must be on the Platform before Trustees will complete and sign the PSD Pack. Subsequent balance transfer must be on platform in SIPP Cash Facility before Novia Trustees will execute Legal Documents to send to PHG Asset Management > All legal documentation will be completed on behalf of the SIPP Trustee by Charles Russell the appointed legal firm for conveyancing. > Novia will levy a set up charge of 250 per asset which is non-refundable out of the initial working capital requirement > Novia will not levy an annual SIPP Commercial Property charge, all charges will be taken as per the AMC currently in place > The property manager will be PHG Property Limited > PHG Asset Management will charge a minimum set up fee of 500 > PHG Asset Management will levy a minimum non-refundable annual charge of 250 (collected in advance with their set up charge from the Asset Bank Account) > Upon completion of the acquisition, PHG Property Limited will levy their annual management charge ( 250), in advance, pro rated for the current year (to September) > PHG Asset Management will offset the costs of the purchase of the property by the SIPP Trustee from the Asset Bank Account. In the event of a failed application this will still be true. Estimated costs will range between 2,500 and 7,500 depending on the value of the property however the estimated cost for the acquisition for each proposed transaction will be supplied in advance > Transfers Re-registration from another SIPP is acceptable otherwise cash funding will be required from the SIPP to facilitate the property purchase > All other Adviser commercial terms are as prior agreements for the firm concerned 2. Novia SIPP and direct commercial property Novia SIPP Trustees Limited is the Trustee of the Novia Self Invested Personal Pension Plan. Novia SIPP is a full SIPP and the Trustees will allow the Investor to self invest in any asset that meets three criteria: 1. It is a permissible investment within the guidelines for pension plans as determined by HMRC from time to time. 2. The investment is professionally managed 3. The investment is prudent Property is an investment that requires careful consideration of each criteria. For instance: 1. A commercial property that has a residential element may not qualify as a permissible investment 2. A property where landlord inspections are not undertaken causing a breach in statutory regulations would not be professionally managed 3. A property where no environmental impact survey has been conducted may not be prudent

3 As the legal owner, Novia SIPP Trustees Limited has the overall responsibility for ensuring that all aspects of the property investment are professionally considered. This is necessary, not only to protect the trustee, but to protect the interests of the Investor who is an Investor of Novia SIPP and who has a beneficial interest in the property. Novia Financial also recognises that the Investors in many instances will want to be heavily involved in some or all of sourcing, managing and selling the property. The Trust Deed and Rules for Novia SIPP require one or more Fund Managers to be appointed by the Investor. The Fund Manager has responsibility for managing the investment and reporting to the Trustee. This process applies to property just like any other investment class. It means that Novia Financial can do what it does best (pension administration) with the confidence that a professional manager is undertaking its core business of fund management. 3. Fund Manager The role of PHG Asset Management as Fund Manager is broadly to manage a portfolio of assets on behalf of Investors. The Novia SIPP Trust Deed recognises that investments in land or property often take a slightly different form to investments in stocks and shares. The Trustee appoints PHG Asset Management to manage the interest held under one or more Investor s Funds. The Trustees require the Fund Manager to: > Establish the legal structure by which they manage the fund, including the appointment of a valuer and solicitor to acquire the property > Make all arrangements including the appointment of a valuer and solicitor to acquire the property > Provide instructions to solicitors and other professionals appointed to deal with the purchase of the property > Arrange and authorise payment of all taxes and expenses in purchase of the property > Arrange the appointment of PHG Property to manage the property to professional standards > Provide accounts at the end of each accounting period > Seek approval of Investors when major decisions in respect of the property are considered by the Fund Manager > Include provisions for the partial sale of an interest when there is more than one Investor > Make all arrangements including the appointment of a commercial property agent and solicitor on sale of the property > Terminate the fund on the sale of the property and distribute the proceeds to the trustees > Include provisions to act on any instructions of Novia SIPP Trustees Limited when it is acting under the provisions of the Novia SIPP Scheme Trust Deed This arrangement means that Novia Financial can easily accommodate property investment which is held under a syndicate agreement. Acquiring commercial property as a pension investment can be complex. This complexity can increase when the professional Advisers involved are not familiar with pension regulations and the role of the pension trustee. Investors considering a property should carefully consider all the attendant costs. The Fund Manager would arrange payment of all costs associated with establishing and managing the fund, including the costs of acquiring the property, by deducting them from the funds held in the property fund account. However, some fund managers opt to charge fees directly to the Investor s Novia SIPP fund with Investor agreement. Novia Financial, as the operator of the Novia SIPP scheme, does not charge any additional fees when an Investor invests in direct commercial property. However, the Trustees, who appoint the

4 Fund Manager, may pass on to Investors any professional fees it may incur in reviewing or assisting Investors and their professional Advisers. The experience of Novia Financial is that the Trustees will have no cause to refer to their own professional Advisers when the third parties involved have proven experience and regularly undertake the acquisition of properties for pension trustees. 4. The PHG Fund and Property Management Service Novia Financial has partnered with PHG Asset Management to provide a Fund and Property Management Service. PHG Asset Management Limited and PHG Property Limited provide fund management and property management services to numerous registered pension scheme administrators who have collectively acquired over 110 million of property on behalf of almost 1000 pension scheme Investors. The PHG Asset and Property Management Service provided to Novia SIPP establishes a deed between Novia SIPP Trustees Limited, the investing Investor(s) and PHG Asset Management. The deed acknowledges the Investor s instructions to the Trustees to acquire the property and appoint PHG Asset Management as Fund Manager to professionally manage the investment whilst still referring to the Investor(s) on any major decisions. PHG Asset Management will advise the Trustees on all taxes, fees and expenses to be paid, prepare accounts as required and arrange for the appointment of PHG Property to manage the property. With this arrangement there is no need for Novia SIPP Trustees Limited to review any new documentation. Hence, there are no additional fees incurred by Novia Financial. Further details of the PHG Asset and Property Management Service can be obtained from Novia Financial. 5. The property purchase process Commercial Property purchases can be complex in their own right. The process will also involve more steps and parties when a pension fund is involved. However, with the appropriate attention involvement of professional Advisers who are familiar with the requirements of pension funds, this need not create additional complexity for Investors seeking to control their investment in commercial property. The following flowchart summarises the steps involved when a property is acquired in conjunction with the PHG Asset and Property Management Service.

5 Adviser and client complete the Novia Property Fact Find (PFF). The Adviser returns the PFF to Novia Financial The Novia SIPP Trustees give initial approval with guidance from PHG Property Limited s (PPL) Chartered Surveyor to When the Novia SIPP Trustee approves the purchase, PPL produces the Property Syndicate Deed (PSD) and Property Management Agreement (PMA) and sends them to the Adviser for signature (not to be dated). These documents will 5.1 Assessing the suitability also include of a the Cost property of Acquisition Estimate and Fee Schedule The Novia SIPP Scheme arranges transfer of funds to the SIPP account The signed PSD and PMA are returned to PHG Asset Management (PAM) having been executed by Novia SIPP Trustees PAM establishes the Fund in the Client s and Property s name and opens a bank account. A working balance of 10,000 transferred into the account. As soon as the bank account is set up thee Novia Establishment Fee, PAM Fund Establishment Fee and Annual Administration Fee is paid PAM instructs solicitors to draft a Lease to send to the Tenants for signature. The Lease is executed by the Tenants and sent to PAM for execution by the Trustees upon completion of the purchase Prior to completion the solicitor produces a Report on Title and Purchase. The Report is sent to the Client/Member for their approval and signature, a copy of which is then sent to Novia SIPP Trustees PAM instructs solicitors to complete on behalf of Novia SIPP Trustees and arranges transfer of funds for completion and mortgage funds if applicable Completion occurs and Novia SIPP Trustees instruct PPL to commence Property Management. Upon completion the PPL annual management fee is taken The assessment of suitability is based against two high level criteria: 1. Is it a permissible investment? Novia Financial will review the information in conjunction with your independent financial Adviser and provide an indication on whether this is an evaluation against the HMRC rules on pension investment including purchasing arrangements, borrowing, use of the property and lease terms. 2. Is it a prudent investment? This is an assessment of risk that the Trustee undertakes that includes the ability of the fund to meet loan repayment terms, the availability of insurance, environmental risk and security of title. The Property Fact Find including the Investor Fund Details should be completed and returned to Novia Financial. Novia Financial will review the information in conjunction with you independent financial Adviser and provide an indication on whether the property is suitable. Where appropriate, any potential issues will be identified. It is advisable to resolve these issues prior to establishing the fund and entering into fee agreements.

6 It is important to recognise that final approval of a property as a suitable investment cannot be given by the Trustees until all the due diligence associated with the property acquisition has been completed by the appointed professionals. 5.2 Establishing the fund Investors using the PHG Asset and Property Management Service will have a fund established by a Property Syndicate Deed. The Property Syndicate Deed will determine the role, if any, that investors will take in ongoing property management. Once the fund is established PHG Asset Management can start making arrangements for the acquisition of the property. The Trustees will transfer funds from the Investor(s) SIPP account into the designated fund account. If the acquisition does not complete the Investor(s) will be liable for all costs incurred by Novia Financial. PHG Asset Management and their appointed Advisers. In this event the costs are deducted from the fund and the net proceeds are returned to the Investor(s) SIPP account. 5.3 Purchasing the property PHG Asset Management will appoint solicitors, valuers and any other parties. Before exchanging contracts the Trustees will require: > Sufficient Investor(s) funds in the property fund to complete the acquisition > A valuation and environmental risk report on title from the solicitor > A satisfactory report on title from the solicitor > A satisfactory lease or agreement for lease to be in place ready for execution > Any indemnities to be agreed and in place > Confirmation from PHG Asset Management that appropriate insurance is in place for the building and any other insurances as required > Legal documentation in respect of any other supporting arrangements are in place Where required, Novia Financial can work with PHG Asset Management to effect a simultaneous exchange and completion. 6. Property management The Trustees delegate their responsibilities as landlord to PHG Asset Management and PHG Property. It is the responsibility of PHG Asset Management to ensure that the tenant complies with the obligations of the lease and to advise the Trustees of any actions they are required to take as landlord. The costs of property management are paid from the fund in accordance with the Property Syndicate Deed. 7. Fund management and reporting PHG Asset Management will be required to operate the fund accounts on behalf of the Trustees into which rent collected is credited, and all fees and expenses and any loan payments are debited. The Property Syndicate Deed determines that PHG Asset Management has the mandate to authorise payments from the property fund account. The Property Syndicate Deed will define how PHG Asset Management reports to Investor(s) on the performance of the fund. The Trustees require that statements of bank accounts and mortgages are provided annually for the fund and that the property is valued at least every five years. The Property Syndicate Deed will define what action should be taken if the fund has a surplus or forecast deficit in funds. In the event of a surplus it is normal to return this to the Investor(s) SIPP

7 account. In the event of a deficit then the normal action would be to seek further funds from the Investor(s). If further funds are not made available then PHG Asset Management may have to sell the property. 8. Selling the property At some stage during the investment and pension planning process, arrangements will need to be made to sell the property. The sale of the property will be arranged by PHG Asset Management and initiated by the Investor(s). In certain circumstances the Trustees may instruct PHG Asset Management to sell the property. This may happen if the investment is no longer professionally managed, ceases to be prudent or is no longer regarded as a permissible investment. If the investor(s) fail to take action and instruct PHG Asset Management to act accordingly then the Trustees have the right under the Novia SIPP Trust Deed to instruct the sale of the property. On the sale of the property PHG Asset Management must advise the Trustees of the net value of each Investor s interest in the fund, after making provision for all taxes, fees and loan repayments. This is then paid into the Investor s SIPP account. PPG-0216