Ross Brooke Financial Services

More than just a pension (Part I)
By Michael Roberts - 29th October 2009

Most people are familiar with the idea of paying into a pension scheme of some form in order to receive what can be generous amounts of tax relief. However pensions can have far more uses for financial planning both for individuals and for companies. In my forthcoming series of articles I am going to explain some of the less obvious financial planning scenarios where pensions can be of great benefit.

In my first article of this series I am going to concentrate on Small Self Administered Schemes (SSAS) and in particular the use of the loan back feature.

What is a SSAS?
A SSAS is a type of occupational pension scheme which is typically used for pension planning for directors and senior company executives. As the name suggests, the scheme allows far greater flexibility and self investment than a typical pension scheme. In many ways their investment options are similar to Self Invested Personal Pensions (SIPPs), which have received far greater press coverage than SSASs, especially in the past few years.

Why not borrow from a Bank?
As many business owners have found recently, banks have become increasingly reluctant to lend to businesses despite the best efforts of the government to encourage such lending to help keep the economy afloat. Even businesses which are seemingly of good credit risk, it is common to see loan interest rates quoted of 5% or more above the prevailing base rate. This may not seem too bad in terms of monthly payments now, but if the base rate were to return to the levels seen in the middle of last year, this would result in a significant increase in monthly repayments.

Enter the SSAS
As part of the investment flexibility of a SSAS, most schemes (subject to scheme rules) allow the trustees of the pension to loan up to 50% of the scheme’s assets to the company. This can often be far more preferable than being beholding to the bank manager.

In addition, the interest rates can be far more appealing. Whilst the business is still charged interest on loans from its SSAS, the rate is a far more reasonable minimum of 1% above base rate. Even better is the fact that any interest paid is going directly into your pension scheme, and not the pockets of the bank. It is important to note, however, that the loan must be repayable over a maximum of 5 years.

How it works in practice
The following example explains how this might work in practice.

David has three personal pensions which he has accumulated over the years with various providers, worth about £80,000 in total. He owns his own limited company which is doing reasonably well, but needs an additional £40,000 to expand. Rather than go cap-in-hand to the bank, David could consolidate his three personal pensions into a new SSAS. As mentioned above, up to 50% of the scheme’s assets can be loaned back to the company, which gives the £40,000 David’s business requires, with the balance to remain invested within his pension. David’s firm would repay the money to the SSAS over a period of five years, with interest at 1% above base (the interest payments are also tax deductible.

Taking it one step further
In the example above, imagine David needs £50,000 rather than £40,000 to purchase some machinery for his factory. He has £20,000 in the company account towards this, but needs to borrow the rest. Again, rather than going to the bank, David could invest the £20,000 into his SSAS as a one off pension contribution, along with the £80,000 transferred in from his 3 personal pensions. This gives a total fund value of £100,000. Again, he can borrow back 50% of the scheme assets which allows him to purchase the machinery he needs.

The £20,000 pension contribution would benefit from full corporation tax relief, and he would also benefit from £50,000 corporation tax relief under the annual investment allowance when he buys the machinery. This coupled with the low rate of interest and greater control over the borrowings makes for a very attractive alternative to bank borrowing.

Other things to consider
As with any financial decision, it is important to consider the consequences prior to moving all your money into a SSAS. It is fair to say that as Small Self Administered Schemes are more complex than the typical personal pension, therefore it is important that you fully understand what you are taking on. There are also costs involved in setting up the SSAS, and you may incur charges or loss of benefits in amalgamating your existing plans. These are just a few of the issues to consider and we would strongly recommend seeking independent financial advice on the matter to ensure any changes you make are in your best interests. If you would like to discuss how a SSAS could work for you, please do contact us.

Disclaimer
This article is based upon our understanding of the current legislation, which is subject to change. This article is intended as a basic description of the principle of SSAS loan backs and we would recommend that you seek specific advice relevant to your individual circumstances.