SSASs: Helping business owners make the most of their pensions

With trust in financial institutions and traditional pension plans in decline, a growing number of business owners are taking advantage of the benefits that Small Self Administered Schemes (SSASs) have to offer.

In this article, Sonia Day examines the subject of SSAS and why it matters for business owners and individuals.

We explain more about SSASs and, in particular, how entrepreneurs can use existing pension savings as a means of alternative finance for their business.

Small Self Administered Pension Schemes (SSASs) were introduced in the late 1970’s to encourage entrepreneurs and business owners to save into a pension scheme. A key feature of SSASs when they were introduced – which remains to this day – is that they can loan up to 50% of their net asset value to companies controlled by the scheme members.

SSASs remain the most flexible type of pension scheme available in the UK, as they are the only pension schemes that permit loans to companies controlled by the members. They are also used to purchase commercial property, which can be leased back to the business.

Traditional pension plans limit investment choices to a range of managed funds selected by the provider. With the SSAS structure, it is possible for members to choose how they wish to invest their funds (subject to HMRC rules).

This enables business owners to control their pensions in a way that closely mirrors how they run their company and personal assets.

Loans

While many owner-managed businesses would love to enjoy the corporation tax relief that comes with a pension, they are wary of tying up cash they might need in the future.

This concern is alleviated with an SSAS; up to 50% of the pension fund can be loaned back to the company. For example, an SSAS valued at £500,000 – which could come from existing personal pension and SIPP savings – can lend £250,000 to the member’s company without any bank involvement.

The company would pay a commercial rate of interest to the pension fund, further benefiting the owners. SSAS loans are often cheaper and simpler to arrange than those offered by banks, which make them an attractive form of alternative business finance. HMRC have criteria that must be satisfied for the loan to be permitted but this can be done simply and relatively inexpensively compared with other forms of finance.

Loans can be made to investment companies as well as trading businesses, further enhancing SSASs appeal to entrepreneurs.

The loan however must be on a “commercial basis” and it is the trustees of the scheme who make the loan terms and conditions.

Property

An SSAS can invest in commercial property and then lease the property back to the business. There is no limit on how much a scheme can invest in property, so 100% of its funds can be used. In addition, SSASs are permitted to borrow up to 50% of their value.

As an example, a three member SSAS with assets totalling £1 million can purchase a property valued at £1.5 million by borrowing £500,000 with a mortgage over the property. The SSAS can repay the mortgage out of the rental income it receives (which comes into the pension scheme tax-free). A SSAS can buy property jointly with the company or the member.

An SSAS can have up to 11 individuals in a single scheme, meaning that families or business partners can amalgamate their funds, making joint investments very simple and opening up investment opportunities that would not be available based on a single individual fund size.

There will be additional fees involved in the commercial property purchase, such as stamp duty and legal fees, which should be taken in to consideration.