Self-invested personal pensions (Sipps) open up an almost unlimited world of investment choice with the likes of fine wine, zoos, residential property and even a yacht berth among the more unusual investments you can hold.
"Sipps have changed pension investments from the fuddy duddy to something that can be much more hands on. This means you can really engage with your pension," says Francis Moore, managing director of European Pensions Management.
Commercial property, including land, is probably the most common exotic investment, with all manner of properties falling into this category.
Nathan Bridgeman, director of pensions consultancy at Talbot & Muir, says his company has helped people put all sorts of commercial properties into their Sipps. "We had four clients with old insurance company schemes who wanted to buy a museum in London, so they set up a group Sipp to do this. We've also helped someone purchase a zoo in the South of England. They own the buildings and the land, but not the animals," he explains.
Sporting venues, including racecourses, dog tracks and football stadiums, are another potential investment. For example, some of Mr Bridgeman's clients hold part of a second division football club stadium in their Sipps. "The club's fans were offered the opportunity to buy a share of the stadium and around 50 of them took up the offer. Their pensions receive rent from the club, but they also get to invest in something they understand and love," he adds.
Overseas commercial property is also an option with everything from land in eastern Europe to hotels in the Far East held in Sipps. "We see plenty of hotel complexes in Koh Samui in Thailand and in the Turks and Caicos Islands being put into Sipps," says Martin Tilley, pension consultant and business development manager at Dentons Pension Management. "I also have a client who owns a yacht berth in the south of France through his Sipp. This is basically 400 square metres of water, air and wood, but it has generated a 12 per cent yield as well as is appreciating in value over the last five years."
Another overseas commercial property investment that Mr Tilley has recently seen is Romanian land, through an investment packaged by Avanti. This takes advantage of the post-communism return of land to the Romanian people. Although the land was divided into small strips, Avanti looks to consolidate these into larger plots, which, because they can then be developed, increases their value.
For something even more earthy, Japanese love hotels can also become part of your pension investment. There are around 25,000 love hotels in Japan, attracting some 500 million visits a year. Offering the opportunity to tap into this is Japan Leisure Hotels, a closed-ended company registered in Guernsey that currently invests in five branded love hotels in Japan. "I haven't been involved in the purchase of a leisure or love hotel in a Sipp, but it would be a perfectly acceptable investment," says Mr Bridgeman.
But, although commercial property is a permitted investment, caution is still required when adding it to a Sipp portfolio. "If you're investing in an overseas opportunity, you need to be aware of the country's legal framework. This can affect ownership as well as your tax position," warns Mr Moore.
It's also important to make sure that the investment is permitted. Mr Tilley says he sometimes comes across schemes that fail to meet the criteria because of a minor detail. "If a hotel complex includes a couple of weeks' free accommodation, this would be classed as a privilege and it wouldn't be permitted. Where this type of offer is included it would have to be stripped out before it would be acceptable as a Sipp investment," he explains.
It's also possible to invest in many of the assets that have been blacklisted, such as residential property, fine wine and art, as long as you don't hold them directly. Instead, you can include them through a fund, providing it is what HMRC terms a 'genuinely diverse commercial vehicle'. Mr Moore explains: "To be considered a genuinely diverse commercial vehicle, the fund must have a value of at least £1 million pounds and must hold at least four properties; with no one property making up more than 40 per cent of the total fund."
The Sipp providers have seen a number of funds that satisfy these criteria. For example, Mr Moore singles out London Central Portfolio, which runs funds that buy properties in prime locations in London to renovate and then let to tenants. For an alcoholic Sipp investment, Mr Bridgeman picks Curzon Capital's Fine Wine Geared Growth fund, which invests in investment-grade wines from the Bordeaux region of France. And Mr Tilley says he has seen several fine art funds launch to take advantage of the growing interest from Middle and Far East buyers. "These are specialist investments," he adds, "but they offer Sipp investors a non-correlated asset to add to their portfolio."
But while these investments are fun and can help to diversify as well as spice up your portfolio, they do come with wealth warnings. "Investors can be incredibly attracted to headline rates and promises," says Mr Moore. "Our job is to pull them back to earth."
In particular, Mr Moore says that once you get beyond the reach of regulators such as the Financial Services Authority, there's much less control over what is included in marketing literature.
Additionally, plump for something HMRC doesn't like and you can be stung badly. "A tax charge of up to 55 per cent on the value of the asset can be applied against the member and up to 15 per cent on the Sipp provider," says Billy Mackay, marketing director at AJ Bell. "It used to be much more straightforward before the pensions regulations changed in April 2006. Investments were either on or off the permitted investment list. This list doesn't exist anymore."
What can be more galling is that you can be hit with the tax charge even if the investment was only non-qualifying for a short period of time. For instance, the Association of Member-Directed Pension Schemes, which represents Sipp providers, has an example of an investor who bought a property with his Sipp. Although it had residential property planning consent on the Friday he bought it, this was changed by Monday. However, HMRC got wind of the original consent and a 55 per cent tax charge was levied on the value of the property.
Because of this punitive charge, some Sipp providers prefer to steer clear of the more esoteric investments altogether. "We take the view that some of the more extreme investments are more dangerous than they're worth," says Mr Mackay.
Those providers that will consider the unusual are keen to point out the extent of the due diligence they carry out before giving an investment the all-clear. Mr Tilley adds: "Tax is certain, so we're very cautious about ensuring investments are permitted. We haven't had any instances of HMRC saying no."