M any of the business owners we talk to have implemented workplace pensions for their employees but some may have neglected to give proper consideration to their own long term financial security. Some of these business owners may see the value of their business as their pension, as they anticipate selling their business before they retire. But there is an inherent risk to relying solely on the sale of the business, and such a plan should be underwritten by sensible financial planning and adequate pension provision. Such a strategy can present an opportunity for the owner’s pension plan to interact with their business to mitigate tax through remuneration planning, and to provide funding to grow the business and hold property. This balances short term liquidity of the business with long term financial security of its owner. Pension planning for business owners and senior management can involve the creation of either a SIPP (Self-Invested Personal Pension) or a SSAS (Small Self- Administered Scheme). What are the key differences, and is one more advantageous than the other? Both are regulated pension schemes but a SSAS is an occupational pension scheme and a SIPP is a personal pension. SSAS requires a sponsoring employer, and members are usually employees and directors of the sponsoring employer but limited in number. There are a number of other aspects of governance and regulation on scheme trustee duties and investment policies which this article does not consider and independent expert advice should always be taken. A key difference though between a SIPP and a SSAS and one which represents tax planning opportunities is the ability for the SSAS to loan money to its sponsoring employer. Example Terry and his wife June are both 50 and own a company. They are considering an investment in machinery of £200,000 for which the company can pay cash. They each have an income from the company of £75,000 comprising a mixture of dividend and salary.
Overriding any strategy to utilise a pension fund to best effect are the annual pension contribution limits and the lifetime allowance that can apply to members contributions. The annual contribution limit of £40,000 is tapered if income is greater than £150,000 and reduced to £10,000 in the event that income is greater than £210,000. The lifetime allowance is £1,030,000. Unused allowances from the previous three years are available to enable lump sum contributions greater than the annual allowance to be made. A SSAS structured as a defined benefit scheme means the basis of calculating the contribution required to invest in the scheme can differ from a SIPP. The actuarial calculation of the contribution the sponsoring employer can make is based on the pension fund that is required to fund the retirement benefits of the members. The retirement benefit of the member is the part tested against the annual allowance not the contribution paid by the sponsoring employer. This means that the level of contribution might be greater than the annual pension limit of an individual member. This can be advantageous for business owners who may have inadequate pension provision yet enjoy a level of income which restricts their annual pension limit, or a business owner who may have already drawn benefits from a pension scheme which can restrict contributions made to a defined contribution scheme (such as a SIPP) to £4,000 in a tax year. Scrutton Bland have considerable experience in advising SME business owners on this topic. If you are interested in finding out more, please remember that getting expert independent advice is paramount to ensure the right strategy is devised and implemented to take advantage of the most appropriate pension solution for you and your business. Contact Nick Banks on 01473 267073 or nick. banks@scruttonbland.co.uk , or James Wright on 01473 267000 or james.wright@scruttonbland.co.uk
Terry and June currently hold existing pensions totalling £200,000 but have not made pension contributions in recent years, and acknowledge they have inadequate pension funds for their retirement. They are very aware that the machinery purchase will qualify for 100% capital allowance and reduce their company tax bill by £38,000. Pension solution Terry and June could set up a SSAS of which they would be members and their company the sponsoring employer. The company could make an employer contribution of £100,000 each to the SSAS. As an expense to the company, this pension contribution would reduce the company tax bill by £38,000. There are important considerations to ensure that the contribution can be allowed for tax purposes. In addition they can transfer in their existing pension arrangements. The SSAS could then loan the money back (up to 50% of the SSAS net assets) to the company with an appropriate loan agreement requiring security and interest being paid over a fixed term. The company purchases the machinery and secures the capital allowances and therefore a further tax reduction of £38,000. In this example, by using a SSAS, Terry and June have doubled the tax relief they might otherwise have obtained simply by purchasing the machinery. Ownership of company property can be managed in both a SIPP and a SSAS, and it is a very tax efficient model since the rent the business might be paying to a third party landlord can be diverted to the benefit of the owners’ pension fund. Both a SIPP and a SSAS can borrow money of up to 50% of the pension fund, and this can leverage the pension fund to acquire the property, with the ongoing rent servicing the debt. The purchase of commercial property directly affords very limited scope for tax relief, but securing tax relief on pension contributions to fund the acquisition indirectly will enable a tax saving to be made on a major investment. Holding property in a pension fund manages business risk and can protect an asset in the event of business failure. Forward planning may be required, depending on the value of the premises to be acquired, to ensure sufficient contributions can be committed to the pension fund within prevailing limits applicable to pension contributions.
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