Pension Self Investment opportunities to fund your business
Self Investment provides you with considerably more freedom in respect of your investment opportunities not least the opportunity to;
- Purchase commercial property for your business
- Make loans to your business (providing you are a Limited Company)
Commercial Property purchase
Property purchase could generate significant cash flow as there would ultimately be no mortgage to pay and this would provide a buffer against hard times if profits reduce. Furthermore, the pension contributions and rent paid by the Company can be offset against profits ie they are tax deductible!
Apart from the Pension fund receiving a market rent from the Company for the property and this will be growing from what is a relatively low capital value. The property itself should represent a solid investment, with high income and capital growth potential, all of which is tax free, including the ultimate sale of the property. As you can appreciate all these benefits are within limits prescribed by the Inland Revenue so that the amount borrowed to fund property purchase is limited to 50% of the fund value can be borrowed in the form of a mortgage if required.
By transferring the ownership of property to the Pension Fund it will assist in protecting it from a receiver (should it ever be necessary!), and will allow the Company to retain control of an asset which is critical to it’s continuity. In the event of insolvency, the Directors, who will all be Pension Scheme Trustees, will remain in control of their pension assets which will include the business property, and the benefits of such an arrangement are obvious.
As you can appreciate all of the above facilities come with a range of fees and charges as well as an inordinate amount of regulation so they do require careful consideration however it is always worth exploring and comparing to traditional funding options, particularly when lending by the Banks and traditional institutions is becoming increasingly difficult to procure.
Loans to your Company
The loan to your business is actually made from the Pension fund itself. Put simply, who would you rather pay interest to, yourself or the Bank? However loans do have to be established on a HMRC prescribed basis and fulfil the following criteria;
- It must be for a documented bona fide commercial purpose
- Must be secured against a saleable asset, (this can be a personal asset such as a house) which has been independently valued by a recognised professional such as a member of RICS or an Accountant and it must be capable of a charge being Registered against it.
- The loan must be on a capital repayment basis
- The loan term must be fixed and not exceed 5 years
- It must be set at a commercial rate of interest
- The loan amount to your Company must not exceed 50% of the net assets of the value of the pension fund
- There must be a standard loan agreement in place
The loanback system is relatively low cost and good value and as the Pension Scheme Trustees and Company Directors are one on the same, you are unlikely to foreclose on yourselves. It is therefore low risk for the Company, and as it is secured it is also low risk for your Pension Fund. However do be aware any failure to make the scheduled repayments or fulfil any obligation under the loan agreement will be a reportable event and attract the attention of HMRC so it is not something to be undertaken lightly. There is also the very real risk that should your business fail you will lose both your livelihood and your pension income in retirement so this is something that should not be entered into without very serious consideration.
There are 2 main options for Company Directors: Small Self Administered Scheme (SSAS) or a Self Invested Personal Pension (SIPP) an overview of both is provided below.
For investment you may choose any combination of Pension Funds, Unit Trusts, Investment Trusts, shares, bonds, futures, options and of course commercial property. Collective Investments alone (i.e. Unit Trusts, etc.) provide you with in excess of 20,000 investment opportunities, so considered analysis taking into account performance, volatility and charges is important. This also means that regular monitoring and awareness of investment markets is vital to the long-term success of your pension funds.
This greatly increased opportunity to improve returns and structure your Pension to meet your individual needs inevitably increase in the amount of administration required to manage your pension plan and significant amounts of correspondence with the relevant departments of the Inland Revenue to ensure that all transactions are within the strictly prescribed guidelines laid down by the regulations.
SSAS – an overview
A SSAS usually evolves when the directors of a business want more control over the investment decisions relating to their pensions and in particular, use their pension plans to invest in the business. As such, each member of the SSAS is usually a trustee.
The following are features of a SSAS:
- It is an occupational pension scheme governed by company pension Scheme rules,
- members are usually employees and directors of the sponsoring employer,
- The SSAS can hold a maximum of 11 members
- Each member has a notional share of the SSAS funds including assets such as property (so you and Alex will have segregated Pension funds)
SIPP – an overview
A SIPP is a personal pension plan set up where the member has greater control over the investments. Anyone can set one up providing they meet the provider’s eligibility requirements. These are usually based on a minimum fund size because of the higher costs involved in running a SIPP compared to a personal pension. Investment options are wide but not unlimited as you will see from the table below and Investments need to satisfy HMRC requirements to be acceptable as an investment in the SIPP. Please note that the list of investments provided is not exhaustive and if your investment choice is not on the list please contact us.
|Investment Opportunities||Unacceptable Investments|
|Commercial property||Residential property (including ground rent)|
|Land||Loans to connected parties|
|Unit Trusts and Open Ended Investment Companies||Plant and machinery|
|Shares quoted on recognised worldwide stock exchanges||Property investment in Limited Liability Partnerships|
|Shares quoted on the LSE||Antiques|
|Unquoted shares providing you have no controlling interest (20%)||Rare books and stamps|
|Gilts, Bonds and Fixed Interest Stocks||Oriental rugs|
|Secured or unsecured loans to unconnected|
|Gold bullion||Works of art|
|Bank and Building Society deposits||Vintage cars|
|Offshore managed funds||Yachts|
|Hedge funds , Futures and options||Jewellery and gemstones|
|Intellectual property (Including copyrights and patents)||Krugerrands|
SSAS and SIPP compared
A SSAS has more flexibility than a SIPP when it comes to investment. This is because current legislation allows investments to be made in the sponsoring employer ie your business. A SIPP doesn’t have a sponsoring employer (although any employer can contribute to it) but a SSAS does. This, therefore, allows the SSAS to invest in the company. Let’s have a closer look at the investment differences between a SSAS and a SIPP:
|SSAS can lend money to your Company.||Loans are not allowed to any members or any person/company connected to the member. Any such loan made by a SIPP would be an unauthorised payment and subject to tax.|
|Can invest up to 5% of the fund value in the shares of the sponsoring company.||A SIPP doesn’t have a sponsoring employer so can theoretically invest up to 100% of the fund in the shares of any company, including one run by the member. However the taxable property* rules usually make this impossible if you are a controlling Director|
|Can buy shares in more than one sponsoring employer so long as the total market value at the time the shares are bought is less than 20% of the total value of the scheme.||If the company involved is controlled by the SIPP member or an associated person, investment in that company would be regarded as investing in taxable property.|
|SSAS can potentially own 100% of a company’s shares so long as the value doesn’t exceed 5% of the value of the SSAS.||A SIPP can potentially own 100% of a company's shares so long as the company is not controlled by the member, and this is acceptable to the SIPP provider.|
SSAS or SIPP – which one is best for me?
Which is the most appropriate arrangement? Well, that depends to a large extent on who the members would be and just how much involvement you want in the running of the scheme. Many of the differenced were eradicated by recent legislation and loan backs to the company by SSAS are one of the few key differences, a SIPP is certainly cheaper to run but if a loan to your Company is your goal then a SSAS is the only option. It is a case of sitting down and ascertaining what your longer term investment requirements are to determine which is the best route for you and your business. That said it does not preclude you from switching from one to another at a later date should it prove advantageous to do so.