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 that as an individual you can really engage with your pension.
Commercial property, including land, is probably the most common exotic investment, with all manner of properties falling into this category.
London based Talbot & Muir were approached by four clients with old insurance company schemes to buy a zoo in the South of England, so they set up a group Sipp to do this. They now own the buildings and the land, but not the animals.
Sporting venues, including racecourses, dog tracks and football stadiums, are another potential investment. For example, some Talbot & Muir 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.
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."
For something even more earthy, Japanese love hotels (http://en.wikipedia.org/wiki/Love_hotel) can also become part of your pension investment. There are around 25,000 love hotels in Japan, attracting some 500 million visits a year. Western culture which tends to be rather strict about casual sexual activity means that a UK love hotel would probably be closed down within a few months, but in the far east they are a legal booming trade and investement with many being styled in the form of ornate castles, and usually offering very high standard rooms. 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.
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.
It's also important to make sure that the investment is permitted. Dentons web site explains that complex schemes can fail to meet the criteria because of a minor detail, for example 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.
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'. 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, 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, Curzon Capital's Fine Wine Geared Growth fund, which invests in investment-grade wines from the Bordeaux region of France.
Obviously you will need to ensure that the fees and charges for managing these fund investments do not outweigh the tax advantages.
But while these investments are fun and can help to diversify as well as spice up your portfolio, they do come with wealth warnings.
In particular, 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. 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, so check carefully and if you are still unsure get something in writing from HMRC to confirm.
Most reputable Sipp 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.
Tax is certain, so be very cautious about ensuring investments are permitted.