Pensions have certainly had a mixed press over recent years. Stock market volatility, poor performance, and perceived high charges have turned many away.
However, take a look from a different angle and you may begin to think differently.
Whilst the primary aim of a pension is to provide an independent source of income later in life, along the way they can have significant benefits for your business. We thought we would take a look at some of the ways a pension can help your business achieve its goals.
1. Sale and leaseback of property
Do you own your business premises? Do you want to inject some liquidity into your business?
The traditional way of doing this is to borrow from a bank using your property as security, however following the credit crunch banks have become less willing to lend and even when they do the interest rate can be surprisingly unattractive.
Over recent years many businesses have preferred to effectively become their own landlord using their pension fund to help achieve this.
Subject to certain rules a Self Invested Pension Plan (SIPP) or a Small Self Administered Scheme (SSAS) can purchase the commercial property that you own. If you have insufficient funds in your pension both a SIPP and a SSAS can borrow up to 50% of their values from a bank to help facilitate the purchase.
The property would then be leased back to your business, with a rent payable into the pension.
What have you achieved?
- Your business has had a cash injection (remember if you or your business has made a gain on the sale of the property then tax will be payable)
- If your business has made additional pension contributions to help facilitate the purchase these should qualify for tax relief
- The rent your business pays is tax deductible
- The pension does not pay tax on the rent it receives
- As it is in a pension any growth in the value of the property is not subject to Capital Gains or Income Tax
As with any transaction such as this there are advantages and disadvantages. A full review of all the pros and cons is needed before you should proceed with such a transaction.
2. Property purchase
So, you don’t own your business premises but want to buy. Again why not look at using your pension fund, either with or without borrowing to help complete the purchase.
We often see Company Directors combining their pension funds to help purchase a property for their business to trade from.
The combination of tax relief on contributions, tax free growth in the pension fund, the rental payments being tax deductible and received by the pension without liability to tax is indeed a powerful one.
3. Partial property purchase
If your pension fund is not large enough to buy a property outright, or indeed you do not wish to commit the full fund to a single property then there is no reason why your pension could not purchase part of a commercial property in conjunction with perhaps yourself or indeed your business.
4. Sheltering profits
Your business has had an excellent year making healthy profits, that’s great news, but what about the corporation tax?
Essentially you have two options, firstly pay it, secondly find a way of mitigating it. This is where a pension can come in.
Payments into a pension, made by an employer for the benefit of directors will attract Corporation Tax relief.
Yes, there are restrictions on when the money can be accessed, and how much can be taken as a lump sum. However more flexibility has been introduced over recent years with members now able to take the tax free lump sum and defer income payments. Furthermore the money held in the pension fund can be invested in a wide variety of assets, for example property, which as we have shown could help the business.
It is simply a case of weighing up the benefits of a reduced Corporation Tax bill with the restrictions posed by a pension, often when this exercise is done we find Company Directors preferring the reduction in Corporation Tax which a pension contribution can make possible.
5. Options for the over 55’s
Pensions are primarily there to give an independent source of income to facilitate retirement.
However, along the way there are many possibilities which business owners can take advantage of. One such opportunity is the facility to take a tax free lump sum, generally 25% of the fund, from the age of 55.
It’s important to remember that taking any lump sum and using it for business purposes will reduce the income available in retirement, however once this has been accepted many possibilities open themselves up.
Using the tax free lump sum from a Company Director’s pension fund instead of more traditional bank funding can offer many advantages, not least the fact that interest will not have to be paid, nor any onerous underwriting hurdles negotiated.
Furthermore a capital injection by a Director would increase his or her loan account, which can have many tax advantages, and if the Company saw fit it could make additional pension contributions to make good the ‘hole’ in the Director’s pension.
6. Buy shares
When it comes to a SIPP or a SSAS buying unquoted shares, there are essentially two sets of rules; those laid down by HMRC and a further set drawn up by each pension provider.
HMRC allow the purchase of unquoted shares in a trading company to be made by both SIPPs and SSASs. However because of potential issues with taxable property and connected party transactions only a small number of self invested pension providers will allow such transactions.
Each case needs to be looked at on its merits, to confirm what is indeed possible and furthermore that it is to the benefit of all parties concerned.
7. Loan money
Both SIPPs and SSASs can lend money, however the rules for each type of scheme are different.
A SIPP can only lend money to unconnected third parties. Any loan must be on commercial terms and can be up to 100% of the fund value, although many SIPP providers are in practice likely to limit this to a lower percentage. Furthermore HMRC rules state that any loan made can be unsecured, however many SIPP providers are unhappy with this and would want it to be secured on an asset worth at least as much as the capital lent plus interest.
The main difference with a SSAS however, is that a loan can be made to a sponsoring employer. Up to 50% of the value of the SSAS can be lent, security has to be given on an acceptable asset and the loan has to be made on commercial terms.
At a time when bank funding, on attractive terms, is harder and harder to find, borrowing money from your pension can seem like an attractive alternative. There are of course rules that need to be followed, and if the loan cannot be repaid your retirement will suffer, however it can be an alternative way of raising finance and is certainly an option for some instead of more traditional banks.
We told you a pension wasn’t just for retirement! It really can help your business along the way.
Remember though, the ideas outlined above are only a brief synopsis of the possibilities. When considering each idea you should ensure that you fully understand the pros and cons of each option before proceeding.
A further word of warning, the Coalition Government has signalled its intention to reduce the amount that can be paid into a pension and still attract tax relief. The changes are imminent, therefore if you feel the opportunities outlined in this article could be appropriate for you we would urge you to start planning as soon as possible.
The first step is to pick up the phone and book a meeting with one of our expert advisers who will be able to discuss with you the options in more detail and give you a better feel for how your pension really can help your business.
Our advisers can be contacted on 0115 933 8433.