Making the most of pensions
Pension schemes may not always be the top of anyone’s agendas – however, what is often overlooked is the ability to use the additional flexibilities of certain pension schemes to dovetail with business requirements, all whilst allowing the business owner to benefit from the main purpose of a pension scheme and save for their retirement at the same time.
In this article I will explore some of these flexibilities.
Not all pensions are created equal.
Like many things, different pensions offer different flexibilities – ultimately the need for these depends on a person’s objectives.
Certain pensions, known as Self Invested Personal Pensions (SIPP) and Small Self-Administered Schemes (SSAS) offer the highest level of flexibility in UK pension legislation, including the ability to lend money back to connected companies, purchase commercial property and even invest in connected company shares.
Taking each in turn:
This flexibility is specific to a SSAS, given this pension scheme is established by a company, and therefore has the flexibility of lending up to 50% of its net value back to the employer.
There are wider conditions to bear in mind including:
1) Interest rate should be commercial but must be at least 1% above the average base
rate for the 6 leading high street banks
2) At least equal annual repayments of capital and interest
3) Security by way of first legal charge on an asset(s) of equivalent value to the loan plus
4) Term of no more than 5 years, although can be rolled over once
If all the above can be met, this can be an excellent way of creating an investment strategy for the scheme whilst also assisting a business with a particular project or cash flow need for instance. There is the added benefit in that the interest is typically a deductible expense for corporation tax purposes.
This strategy is available for both SIPP and SSAS and can work most effectively for a business if they are trading from an existing property they own or are looking to perhaps expand.
In this instance, the pension fund purchases the commercial building, which is then let out to the company. The market rent is paid into the scheme, again, funding the business owners’ pension as well as (in most cases) being deductible for corporation tax. Payments into the pension as rent are not subject to income tax. The pension fund can also borrow up to 50% of its net value to assist with financing the property purchase if necessary.
The added bonus here is if the property is sold within the scheme, any gain that is made is free of capital gains tax, like all assets within a pension fund.
Dependant on the structure of the pension scheme, and indeed the pension provider, there are different limits in which a pension scheme can invest in a connected business owner’s company via the purchase of shares. However, the broad premise is this option allows the business to potentially raise cash, whilst the pension fund has an asset from which to benefit from ongoing dividends/capital growth in a tax-free environment. Although it is worth noting stamp duty costs and potential capital gains tax may be applicable to the seller.
Word of caution
It is important to note that, although sounding a great idea on paper, sometimes the above may not be the most suitable investment for an individual’s pension scheme.
Given the connected nature, this often makes the transactions relatively higher risk than most, for instance what happens if the company goes through a period of difficulty or ceases to trade and there is an outstanding loan/shares owned by the pension scheme? Or if the only pension asset is a property that is then unable to be let if the business does not survive, along with if there is also a debt/ borrowing to service.
These are all questions and risks that need to be weighed up with an appropriately qualified adviser however there is no doubt that the transactions, and pensions in general, can often assist many different types of business as well as enabling owners to grow their own pension pots for retirement.
Gone are the days where a company would cater for an individual retirement with a gold-plated final salary pension – now the responsibility is on the individual. However, this has also led to pensions becoming far more flexible than most believe and therefore often being overlooked when they should be at least considered as part of a well-rounded financial plan.
If you would like some more help with your pensions, get in touch with Martin Jarvis – Associate Consultant at Mattioli Woods