If you are a business owner, you are now also a pension provider thanks to Auto Enrolment. You are helping your employees save for retirement. But what is the best way to provide for your own retirement plans?
Self-invested Personal Pensions (SIPPs) are a popular solution. Small Self-Administered Schemes or SSAS are less well known, but they could offer a you a valuable advantage.
SIPPs and SSAS – the same, but different
Both types of plan are investment regulated personal pension schemes with all the concessions we have come to expect from HMRC. Both are designed for those with the knowledge and confidence to manage their investments themselves.
SIPPs are set up by insurance companies or SIPP specialists who remain the trustees but allow savers control over the investments, which can include assets such as unit trusts and property as well as trustee investment plans. Anyone can take out a SIPP, but they may involve a minimum fund size because of the high costs compared to standard personal pensions.
As an employer you can contribute to your own SIPP through your business. This may have some tax advantages, as the contributions can be taken before profits.
Only company directors can set up a SSAS, which can have a maximum of 12 members, who will also be the trustees. There are greater costs and responsibilities involved – including a regular fee from a pensions administrator who will issue an annual report for HMRC.
A SIPP is owned by a pension provider who sets the rules and restricts what investments will be made. A SSAS is owned by the members, and within certain limits, they can invest in what they want.
In practice, this is the key difference between the two types of plan. With a SSAS you can invest your pension funds in your own business.
Lending to your own business
If you save in a SSAS you can lend back up to 50% of the total held back to your business, making an SSAS a valuable source of additional funds. The money loaned must be a real investment, rather than an interest-free loan and must be paid back by the company with a reasonable rate of interest. However, it could be at a rate substantially below that offered on a commercial mortgage from a bank, for example.
So, with an SSAS, you could use your pension fund to buy your business premises or major capital equipment or fund any other business initiative that can bring an identifiable return.
Technically, both SIPPS and SSAS could invest in commercial property, and get the rental income paid back into the pension, but the restrictions on SIPPS are much greater. Investing in your own business might be difficult or impossible with a SIPP.
Thanks to the tax advantages of pension investment, a SSAS can provide a cost effective way to raise funds. For some small businesses owners, it could mean the extra cost of setting up a SSAS as opposed to a SIPP is well worth the money.
Pensions and business finance are both complex subjects that need expert support. At Continuum we would be happy to provide it.
The value of investments and pensions can fall as well as rise and you may get back less than you invested.