Running your own business? What sort of pension should you have?
As owner or director of a small to medium sized business (SME), you are now a pension provider, courtesy of auto-enrolment. But what sort of pension should you have for yourself? You can obviously opt for an ordinary personal pension, but many owners choose a SIPP (self-invested personal pension) or SSAS (small self-administered scheme) instead.
So what are they, how do they work and what are the differences? The rules are relatively complex but here is a potted version.
Both SIPPs and SSAS are investment regulated personal pension schemes designed for those who have the knowledge and/or confidence to manage their investments themselves.
A SIPP gives you more flexibility with your investments than the standard personal pension. You take out a SIPP with a SIPP provider who acts as trustee, but you, not the provider, have the choice of what the SIPP invests in. Your business and the members of the scheme can each make contributions to it.
A SIPP is open to anyone and some businesses set up a pooled or family SIPP. This can be used by business partners (as well as family members). You don't have to run a business together to take out a pooled SIPP. It can be useful because of the economies of scale. For example, it could be that you want to use the SIPP to buy a commercial premise because the pooled scheme owns the property.
A SSAS is a small occupational pension scheme that is set up by the directors of a company. It is run by 'trustees' who are usually the scheme members (i.e. the directors), although there are also specialist companies that can act as trustees. The trustees determine the investment policy. As with a SIPP, your business and the members of the scheme can each make contributions to it.
A SSAS is usually only available to company directors, who are normally the trustees. However, members of a SSAS pension don't have their individual 'pot' of the pension fund. Instead, the pension scheme's assets are held in the name of the trustees, with each member having a notional share of these assets. This can mean it is harder to divide the pension if there's a fall out between the directors. Membership of a 'group' SSAS can be made available by invitation to those who aren't employed by your company, so spouses and children over 18 could be invited to join, which can provide financial planning and taxation advantages.
Both options offer a good degree of investment flexibility. SIPPs for example can invest in all 'mainstream' investments such as unit trusts and OEICs as well as shares in individual companies. SSAS schemes can do the same but also allow a wider range of alternative investment options.
Both SIPPs and SSASs can invest in commercial property. This could include any premises that are owned by your business. In this case, the business would pay rent to the pension, which is then used to buy more investments. The rent must be set at a market level.
However, a major difference between a SIPP and a SSAS is that a SSAs scheme can invest in your business and lend money to your company. These options are not available with a SIPP scheme and are a major attraction for many taking out a SSAS. A SSAS can invest in a director's own business subject to a limit of 5% of the value of the pension fund. However, if you own more than one company, the SSAS could invest in all of these businesses, as long as the combined value of the investment is no more than 20% of the value of the pension fund.
While this can work well for many, you need to think carefully before using a SSAS for a loan, as in some circumstances you could be throwing good money after bad by doing so. Further, you need to decide whether you want to have your retirement plans linked to your business in this way.
If the SSAS lends money to the business, it must charge interest, although it could be lower than a commercial bank rate. The loan can't be used to help a company clear its debts but should be used to improve or expand the business.
So which is right for you and your business? That will depend to a large extent on who the members would be and just how much involvement they want in running the scheme. If you simply want to take control of your pension money in a self-invested pension with access to all main stock market investments - and to be in a scheme that is regulated by the Financial Conduct Authority - then a SIPP is probably right for you.
However, if you want to expand your investment choice beyond the stock market options and are possibly looking for a loan to fund your business growth, then a SSAS could be the way to go; bearing in mind that there will be a much higher involvement required in the administration of the scheme.
Self-invested pensions are undoubtedly an attractive proposition for many business owners and directors who want control over their investment decisions. However, if you are not completely conversant with all the advantages and disadvantages of a SIPP and a SSAS, it makes sense to get qualified financial advice.
Contact Kellands Corporate today, to discuss your pension options.