How a pension can benefit your retirement and business

If you own your business, you might have considered a regular workplace saving scheme or a self-invested personal pension (Sipp). But if your business is structured as a limited company, a small self-administered scheme (Ssas) might be a better option for your own and other senior employees’ retirement prospects, as well as the potential growth of the company.

A Ssas is a workplace pension scheme set up by company directors that can have up to 11 members, and usually has a defined-contribution structure. Ssas usually include a few senior staff members, for example other directors or senior executives of the company. A Ssas is jointly controlled and run by its members, who should also be the trustees, whereas a Sipp is controlled by a provider or an administrator who is the master trustee.

Your business’s contributions to the Ssas are a deductible expense for tax purposes so can reduce its corporation tax liability.

Like some Sipps, a Ssas can invest in a far wider choice of assets than regular workplace or personal pensions, including unquoted companies and commercial property.

Unlike any other kind of pension, a Ssas can lend up to half of its total net asset value to the sponsoring employer – your business. The loan's capital repayments and interest go into the Ssas which, in effect, make the loan an income-generating investment for the pension.

The loan could be used, for example, to purchase necessary equipment and help the company grow. There are other ways in which a Ssas loan could be useful. For example, "prior to retirement, a client arranged a loan from their Ssas to their business so the company could clear the money it owed this client as an outstanding director’s loan," says Mark Welsh, financial planner at Prydis. "The loan was secured via a debenture over the value of the company as there was no unencumbered property available. The client then used these funds to clear their own mortgage, and the business repaid the loan to the client’s pension scheme at a market rate of interest.”

However, the Ssas loan to the sponsoring employer has to meet certain conditions. The term of the loan cannot be more than five years and the interest rate has to be at least 1 per cent above the average base lending rate of six high-street banks specified by HM Revenue & Customs. And the loan has to be secured against assets with an equivalent value to the capital and interest payments, for example a building the company owns.

All the trustees need to agree to a loan from their Ssas as they are responsible for its investment strategy and have to agree all investment decisions unanimously. It's advisable for all members of the Ssas to be trustees in order to avoid additional administration and running costs, adds James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham.

A Ssas can also use up to 5 per cent of its value to buy shares in your company but a Sipp cannot invest in shares of a scheme member’s own company or any connected party.

A Ssas can be an efficient way for family businesses to pass down assets to future generations. If children become employees and directors of the company they could also become members and trustees of the Ssas. Martin Tilley, chief operating officer at WBR Group, says that when the parents retire, they could take benefits and remain as Ssas trustees. And if a Ssas owns the business’s commercial premises it can pass more easily to the children. If, by contrast, each family member had a Sipp, the children’s wrappers would have to buy a portion of the commercial property each year from the parents’ Sipps, which would involve multiple transactions and therefore greater expense.

Furthermore, a Ssas can buy commercial property so, for example, if it has enough assets it could buy the building out of which your company operates and lease it to your company. The rental payments to the Ssas can be in addition to pension contributions for the year because they constitute investment income. The rental payments are also a deductible expense for the company, reducing its corporation tax liability.

If you eventually decide to sell the building, the sale would not incur capital gains tax because it is within a pensions wrapper.

A Ssas can borrow up to 50 per cent of its net value from any source, including the sponsoring employer, to finance the purchase of a commercial property. But a Sipp can only borrow up to 50 per cent of its net value from a third-party lender such as a bank.

When a Ssas might not be best

A Ssas may not be the best option if you don’t need to lend to your business, or invest in it or commercial property.

Setting up and managing a Ssas takes a degree of commitment, so ensure that you “have sufficient knowledge and experience to manage [your] own pension investments or seek professional advice”, advises Welsh. However, professional advice incurs costs.

If you and/or other senior employees don’t want the responsibility of being trustees of your pension scheme, a Ssas may not be suitable. Trustee duties can be outsourced or you can appoint a professional trustee to act alongside Ssas member trustees. But “it can reduce the flexibility and control that the member trustees have over the Ssas”, says Welsh.

The involvement of a professional trustee also incurs the costs of their fees. These can vary from around £500-£600 a year for minimal administrative support, to around £3,000-£4,000 a year for a comprehensive bespoke service.

For example, Barnett Waddingham charges a one-off fee of £1,250 plus value added tax (VAT) for setting up a Ssas. On top of this, its annual administration services fee is £1,500 plus VAT or £1,750 plus VAT if it acts as sole scheme administrator. If other services are needed there are further fees, for example, it charges £290 for setting up a collectives investment account, £430 per tax year for PAYE administration of pension payments through its payroll provider, and £390 per tax year for administering relief at source.

A Ssas “needs to be of a size that makes [these] services worthwhile so should be £100,000 plus,” adds Tilley. “£200,000 plus is quite economic."

A falling out between members of the Ssas can be problematic given the need for unanimous decisions. And as a Ssas is one collective scheme invested in the same investments, you need to have similar investment objectives to the other members.

However, while Sipps can, in theory, invest in many of the same things as a Ssas in practice this may not be possible. This could be because the Sipp provider or administrator, who is the master trustee, does not permit that particular investment.

If it’s hard or impossible to value an asset, a Sipp provider might need to increase the amount of capital they hold against it so not allow such an asset. Tilley says that, as an example, he had a client who ran care homes for children which in theory could be held in a Sipp but his provider would not permit it. So instead, he transferred pension assets to a Ssas and used them to buy another care home property and expanded his business.