Self-invested pensions in the Credit crunch

With the country in recession directors and business people tend not to be thinking of pension provision – apart from when they have the nasty surprise of looking at their latest statement. There may however be ways in which their pensions could assist their businesses.

The Small Self-administered Scheme (SSAS) has been a favorite pension and tax-planning tool for advisers with corporate clients particularly small to medium sized firms.

 

The original remit of such schemes was to attract shareholding directors into making pension contributions rather than just investing in their own business by allowing a degree of self-investment and it has been very successful. Since their introduction in 1989 Self Invested Personal Pensions [SIPPs] have also become very popular.

Pension simplification in April 2006 was supposed to remove the distinction between SIPPs and SSAS however the reality is slightly different. True the existing differences in contributions and benefits are removed but some differences remain on investments and constitution. For the Inland Revenue (HMRC) there is still a distinction between company-sponsored schemes, which for ease we will continue to call SSAS and provider sponsored which we will call SIPPs.

Loanbacks from the fund to the sponsoring employer albeit now secured can be made by a SSAS. A SIPP has no sponsoring employer and therefore cannot make any loanbacks to any connected business without being hit with a minimum 55% tax charge.

So how could a pension loan work?

A company director needs finance for his business - he could try a bank or his pension fund. He can transfer his existing funds into a SSAS set up for him by a specialist trustee company like us. The scheme can then lend to his company up to 50% of the fund for up to 5 years, although this must be secured by a first charge on assets of either the company or its directors. A suitable interest rate of at least 1% over base rate is charged and at least annual repayments of capital and interest made.

The result - the business can get an important loan, the director a good return on the money in his pension fund - there is obviously a risk in concentrating pension assets into the company but many directors feel more confident of this type of investment than they do in Insurance companies etc.

Although a SIPP cannot lend to a company connected to the scheme it is worth remembering both a SIPP and a SSAS can lend to 3rd parties. So a pension fund can be used for business angel type investing.

For share purchase a company-sponsored scheme e.g. SSAS is limited to buying 5% of the shares in its sponsoring employer. For a SIPP as there is technically no sponsoring employer the fund could invest 100% in the directors own company shares. There are however some very complex rules that block purchasing shares in your own business except in a few cases but again 3rd party investments are fine for those willing to take a high risk but investing in unquoted businesses.

As long as it is done commercially there is no problem with pension plans buying assets from their members or their members companies. The allowed assets are usually commercial property and quoted shares or other investments.

For example a company that owns its commercial premises but is struggling for cash could sell all or part of the building to its director’s pension scheme(s).

Or a sole trader might sell some shares they own personally to their own SIPP thus releasing cash from their pension scheme.

Also remember that if you are over 50 (rising to age 55 in April 2010) it is usually possible for you to access your pension fund and take benefits and after April 2006 you can take the tax-free lump sum and not draw income. Although it is usually best to defer drawing benefits until you really need to taking all or part of the lump sum to clear some expensive debt, for example may be a worthwhile option.

Finally remember that pension plans need to be invested carefully – some of these ideas can help both the business and the pension but equally could cause a large loss. For those that do not want to get involved in these more esoteric areas (even some SIPP providers are not flexible enough to do some of them – one of the reasons why we have our own in-house SIPP and SSAS) you should still review your pension provision in these unstable times. Review your arrangements to get a reasonably charged plan and a good mix of investments.

Ian Smith BA (Hons), APMI, FPFS, IMC, CFP.
Director & Chartered Financial Planner
Central Wealth Management Limited
Unit 36 East Moons House
Oxleasow Road
Redditch
B98 0RE
 
Also at 29 Harley Street
London W1G 9QR
Tel 0845 0066 204
Fax 0845 0066 254
www.centralinvest.co.uk www.centraltax.co.uk
ian@centralinvest.co.uk
 
Central Wealth Management Limited is an appointed representative of Central Financial Planning Limited which is authorised and regulated by the Financial Services Authority.