This case study demonstrates how clients can use SSASs to save for their retirement in a flexible, tax-efficient manner, to compliment and assist their business operations.
Setting up the scheme
Keith and Mick own a successful manufacturing business. They operate out of a commercial building that they lease from an unconnected third party. Their landlord approaches them and offers first refusal on the purchase of the building.
Keith and Mick have various options opened to them to purchase the property:
- They could purchase the property themselves, with their personal funds;
- They could purchase the property through their company; or
- They could use a pension fund to purchase the property.
The pension fund route is their preferred option due to tax savings. Keith and Mick consider setting up either (a) two SIPPs (Self-Invested Personal Pension) to purchase the property together or (b) an SSAS to purchase the property. They decide to set up an SSAS (Small Self-Administered Scheme) for the following reasons:
- The complexity of owning the property over two SIPPs, with two associated borrowings, was pushing up the costs of operating the SIPPs;
- They are keen on the option a SSAS has to make loans to the sponsoring employer of the scheme; and
- They know they will act as trustees of the SSAS and will therefore retain more control over their retirement benefits when compared to the SIPP route.
Consequently, they set up an SSAS, with the help of an Independent Trustee to assist them with compliance with the relevant HMRC rules.
Purchasing property
Keith and Mick transfer their existing pension arrangements into the new SSAS. They also make sizeable employer contributions to the scheme, which qualify for tax relief within the company. They are still short of the purchase price, so the trustees arrange bank borrowings to assist with the purchase.
The property is purchased and the trustees are now acting as the landlord, with the sponsoring employer the tenant. An arms-length commercial lease is put in place to define the terms on which the property is let to the company. However, the company are now paying rental income to their pension fund instead of to the unconnected third party.
Using SSAS - early years
The trustees use the rental income to service the borrowings, and any surplus is retained in the scheme and invested in a portfolio of quoted investments, managed by a discretionary fund manager.
After a few years, the borrowings have been repaid. Accordingly, all the rental income paid to the scheme is boosting the investment portfolio. The rental income and capital growth soon generate a sizeable investment portfolio, sitting alongside the property as the two main assets of the scheme.
Making employer-related investments
Keith and Mick’s business is doing well, but they have cashflow issues and need to borrow money to keep the business moving forward. They discuss their options with their Independent Trustee and decide to borrow funds from their SSAS instead.
A loan is granted over five years, with the employer paying back interest and capital to the pension fund throughout the term of the loan. Keith and Mick feel this is a much better source of funding for the company, as they are paying interest to their pension fund rather than to a bank.
Drawing benefits
As Keith and Mick get older, they bring their children into the family business to help with the day-to-day operation of the company. Their children also join the SSAS, so can benefit from the greater returns they achieve from pooling their modest pension savings with those of their parents.
Keith and Mick are drawing less income from the company, so both decide to draw benefits from the SSAS. Although Keith and Mick are members of the same scheme, this does not mean they have to draw the same retirement benefits. Keith requires a large lump sum, so draws the maximum tax-free lump sum andcommences drawing a pension, whilst Mick decides to phase his benefits and spread his tax-free lump sum payments over a number of tax years.
While Keith and Mick are drawing benefits, their employer is still funding their pensions by paying their rental income into the scheme. Keith and Mick can choose to draw modest pensions, roughly equal the rental income, or draw greater amounts and use some of the capital held in the investment portfolio as well as rental income. The speed at which they draw benefits is entirely up to them under the flexi-access drawdown rules.
Passing benefits onto other family members
Sadly, Mick passes away. The trustees of the scheme can use the remainder of Mick’s fund to pay death benefits. These benefits are split equally between his wife and his four children, who are each allocated a pot within the scheme, equal to 20% of Mick’s remaining funds. Benefits are paid at the discretion of the trustees. The SSAS now sits outside of Mick’s estate and is free of IHT when these benefits pass to his wife and children.
As Mick passed away before age 75, the trustees are therefore able to offer these benefits to the beneficiaries tax-free. All five beneficiaries are able to make independent decisions as to what they do with their own pot. One decides to draw everything out tax-free in one go, another decides to draw a tax-free pension from the scheme each month, while the other three decide they do not need any income at present, so they decide to wait to draw any benefits until they’re required
Passing property to the next-generation
Keith and Mick’s children have been running the business successfully for some time now and have outgrown the building owned by the pension fund. They find a larger site for relocation and they decide to liquidate the investment portfolio within the pension fund and obtain bank borrowings to acquire this new commercial property within the pension fund.
They consider letting out the old building to an unconnected third party. However, in the end they decide to sell the original property. As the trustees have held onto the property for so many years, the value is far greater than the original purchase price.
However, the trustees do not pay Capital Gains Tax and therefore the wholesale price is paid into the pension fund. The trustees decide to use these funds to pay off the borrowings required to purchase the second property and invest the residual funds in the investment portfolio.
For more details on SASS pension, please don't hesitate to contact a member of our team.
*These case studies are fictional, but the content is based on various, real client experiences.