There are strict rules on what your pension fund is allowed to invest in. Generally, using it to provide funds for your business is a no-no, but there are exceptions. Is this something you can take advantage of?
Pensions and business investments
The rules governing the use of pension savings as a means of financing your businesses have been significantly tightened in the last 15 years. This, for example, prevents a director using their self-invested personal pension (SIPP) from lending to their company or owning shares in it unless they are quoted and the director doesn’t control the company, i.e. have more than 50% of its voting rights. However, the rules for small self-administered schemes (SSAS) are more relaxed.
SSAS basics
SSASs are company pension schemes rather than personal pension plans, such as SIPPs. They are mainly intended for director shareholders and senior employees and their families. The “small” in the name refers to the number of members allowed, usually eleven or fewer. SSASs are controlled by the scheme trustees and usually all those in the scheme are trustees. Together they can decide what the scheme does with its money, although there are limitations and conditions.
Tip. A SSAS can be set up for just one person, say for a one-man company.
SSAS investments
Unlike SIPPs, SSASs can invest and lend money to a company that’s owned and run by its members, subject to the following conditions:
- no more than 5% of the SSAS fund value can be used to buy shares in your company. If there’s more than one company linked to the SSAS, it can invest up to 20% in total, subject to the 5% limit for each
- loans to a linked company must not exceed more than 50% of the fund value and not be for a period longer than five years. They must also be secured on the company’s assets, for example its trading premises.
- No SSAS, no problem
While the scope of investments a pension fund can make have become more restricted over the years, your right to transfer your savings to other schemes has become more liberal, and the charges for doing so reduced by government regulation.
Tip. It’s easy to set up a SSAS and transfer some or all of your other pension savings to it. There will be a charge for the transfer, but it can be as little as £150. Your pension company will tell you exactly what its fees are. If you’re interested in setting up a SSAS, get in touch with a financial advisor or a pension company.
Financial advantages
A SSAS can lend to your company at rates which are typically much lower than your bank will offer. In fact, they need only be 1% above the average base rate of the major clearing banks. Plus, of course, the interest your company pays on the loan goes into your SSAS and therefore increases its value. It’s a win-win.
Tax advantages
As with other registered pension schemes, contributions you make to a SSAS qualify for tax relief at basic and higher rates. Plus, where it lends to your company, the interest payable is tax deductible from the company’s profits.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.