Who might benefit from this page?
- Individuals looking to take control of their pension funds
- Investors disappointed with the returns from traditional pension funds
- Businesses looking for a tax-efficient means to invest in premises
- Business looking for an alternative sources of financing
- Business owners looking for tax-efficient ways to extract profits
Traditional pension funds run by insurance companies have suited many savers in the past and are likely to do so in the future. However since the turn of the millennium there have been a number of ‘shocks’ to traditional insurance based investments which has led to a distrust of pension funds by many investors and a reluctance to invest in pensions as a result.
What benefits can be gained?
- Taking a look at the range of investments that can be held in Self-Invested Pension Plans can reveal a number of opportunities that may prompt a revision of the role of pension plans as a means to invest. It may also breathe new life into old pension that were taken out many years ago. Opting for Self-Investment may means:
- You control the type of assets so you understand exactly where your money is held
- You may be able to use the assets to help in your business
- You set the level of risk by investing in assets you already know and understand
- Capital can be released from pensions to fund commercial property/land purchases, repay borrowings or inject into your business
Pensions continue to offer significant tax advantages and the opportunities to self-invest may make an attractive alternative to making business orientated investments in a taxed environment
What is a Self-Invested Pension?
A self-invested pension is pension plan where you as the member direct the investment strategy. This could be by running your own portfolio of shares but often they are used to purchase commercial property or land – assets that can be exploited in your business.
Self-invested scheme are available for individuals as SIPPs (Self Investment Personal Pensions) or connected to employers as SSASs (Small Self Administered Schemes).
SIPP and SSAS both enjoy the same tax advantages as other pension plans which grant tax relief on member or employer contributions making them extremely cost effective means to acquire assets. For example directing £40,000 of personal funds to a pension scheme makes £50,000 available to purchase self-invested assets. If you are able to claim tax credits, the cost of the £40,000 contribution could be considerably less. Growth in the asset within the fund is tax free as is rent and savings income.
A Potential Source of Business Finance
Take the example of a business which operates out of commercial premises owned by the business itself or more often by the business owner. In the good times the business owner had built up a reasonable pension fund, however now the business could use additional finance.
Whilst the traditional route of bank borrowing may be available to the business the alternative option is now available to sell part or all of the premises to the pension fund releasing the liquid funds for use in the business. Depending on the value of the assets up to 100% of an existing pension fund can be accessed in this way.
The business owner would now pay rent to the pension scheme – but the alternative was pay interest to the bank!
A tax-efficient vehicle for profit extraction
A variation on the above theme would be a similar business running as a company where profits were high leading to the age old problem of how to extract those profits for the benefit of the owners. Paying income in the form of salary and dividends is the traditional choice. However as many families are in receipt of substantial tax credits this option could result in the loss of significant benefits.
If the owners have assets which could be sold to a pension scheme they might choose this as a means to extract the profits via company contributions followed by the purchase of own assets by the scheme.
What Assets can be held?
Amongst other assets you might consider:
- Commercial Property – often leased back to the member or the member’s company.
- Agricultural Land and fish farms
- Shares (listed or otherwise) – this can include the shares in your own limited company
- Collective investment schemes
- Loans – SIPPs can lend money for a commercial return to parties unconnected with the member. A SSAS has the ability to lend money back to the sponsoring employer
Is Residential Property Allowed?
Technically a self-invested pension scheme could invest in resident property but there are very punitive tax charges attached to this which make it highly unattractive and the vast majority of pension providers would not allow this.
Exemptions exists for:
- Residential property which is part of commercial property and necessarily occupied by an unconnected person as part of their job
- Investment is also possible via a genuinely diversified scheme meaning an investment funds where the individual investors have no control over which assets are held and a minimum spread of properties have been purchased.
There are a small number of interesting funds of using the second exemption often based on foreign residential property investment.
Is anything else not allowed?
Tangible Property - Generally items which can be physically touched or moved would fall under the same tax charges as Residential Property so this effectively rules out investment such as Antiques, classic cars and fine wines.
Self-invested schemes typically charge on a fixed fee basis. This means that size matters and larger schemes will find self-investment proportionately more cost-effective that a small plan. To give an example from a leading provider based on purchasing commercial property the SIPP providers costs (excluding advice charges, legal and survey fees and disbursements) would be:
Initial fee £735
Annual SIPP fee 0.24%
Annual Property fee £445
Source Xafinity All charges plus VAT
This means for a SIPP fund of £50,000 the initial costs amount to 1.72% and the annual costs of 1.32% per annum. For a larger fund of £100,000 the impact of costs reduces to 0.86% initial and 0.8%. In both cases the cost quoted above are competitive when compared to many traditional insured pension plans.
What actions can be taken?
- Consider reviewing your existing pension funds. How well have they performed? Are they meeting your expectations?
- If you are considering a commercial property or land purchase could this be more cost-effectively made via a pension scheme?
- For couples, families or businesses consider whether pension funds be combined to make a more cost-effective fund and invest in assets which promote common aims.
- If you have a need to finance or refinance a business venture have you considered if existing pension funds can be used?
- If you have put off investing in pensions because of a lack of control do the new rules mean that you can now consider pensions your plans?
- Where your limited company is making significant profits consider whether pension schemes might offer a way to extract those profits more cost-effectively.
How we can help
- We can review all types of pension scheme from stakeholder pension plans to schemes from previous employers. Our review service helps identify which scheme might be suitable for self-investment.
- We can advise on the setting up of new schemes researching the increasing market place for self-invested schemes.
- We can help you choose between SIPP, SSAS and the new grouped SIPP arrangements.
- In conjunction with our accountancy partners we can help with the tax planning that is the key to maximizing the benefits of pension plans.
- We also advise on all aspects of Retirement income and taking benefits from pension schemes.