Pensions offer all sorts of benefits to business owners. With the tax relief on contributions, no Income Tax or Capital Gains Tax (CGT) on any interest or investment returns, and the ability to mitigate Corporation Tax and National Insurance, they can be highly tax-efficient tools for extracting money from your company.
But before you can reap these rewards, you first need to choose the appropriate scheme for you and your business.
Two kinds of pensions that business owners might look at when making this decision are a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS).
While both offer the same tax advantages, each has varying features that may make one or the other more appropriate in your circumstances.
So, read the main features of SIPPs and a SSAS to help you decide which might be the most appropriate choice for your business.
A SIPP can help you to keep your pension separate from your business
A SIPP is a type of defined contribution (DC) pension in which you select the investments your retirement funds are invested in. This differs from many other personal and private pension schemes, where a fund manager would do this for you.
Typically, you can choose from a range of different assets to invest in, such as:
- Stocks and shares
- Investment trusts and open-ended investment companies (OEICs)
You may prefer being able to select your own investments, because it offers you greater control over how your retirement funds are invested.
However, if you want to do this, you need to have sufficient market knowledge and be confident that you know what you’re doing. Otherwise, you could be putting your retirement savings at risk.
Alternatively, you can employ a financial adviser to assist you in making these decisions. This can give you the peace of mind that a financial expert has a handle on your money.
As a business owner, a SIPP can be useful if you want to save for your future in a fund that’s entirely separate from your business and your fellow directors. The pension will be held in your name personally and you will be entitled to the entire value of it in retirement.
Typically, you can’t invest directly in residential property, but commercial property can be held in a SIPP. As a result, many business owners move their business premises into their pension and then lease it back to the company, generating a return from the rent payments.
A SSAS typically involves multiple people in a business
Unlike a SIPP which is held individually, a SSAS is a type of occupational scheme set up by a business for the benefit of certain individuals involved in the company.
This is often the company directors, but might extend to their spouses, and other senior employees or important stakeholders. When enrolled in a SSAS, these individuals are known as the “trustees”. Whoever’s involved, it’s typically limited to no more than 11 individuals.
As the employer, you are responsible for the day-to-day running of the scheme, although the investment decisions are shared between you and the trustees. This can result in significant administration.
As with a SIPP, you’ll need to be confident that you can make sensible investment decisions between you. Or, you can agree to work with a financial adviser to offer assistance.
When you and the trustees come to retire and draw on the pension, your entitlement is calculated based on:
- The amount that’s been paid into the scheme in each individual’s name – this includes personal contributions, as well as employer contributions
- How long each of these contributions has been invested
- Any investment growth generated during this period, and charges accrued.
The major benefit of a SSAS is that it offers greater flexibility in investment options. Just as you can in a SIPP, many business owners often use a SSAS to buy the business premises and generate a return from rent payments.
Crucially, two key additional options that a SSAS offers is the ability to lend money to your business, and also to buy shares and invest in your company, even if the business is unlisted.
A SSAS may suit your needs if you want the option to be able to borrow money from your pension.
The right option depends on your circumstances
Ultimately, finding the right option between a SIPP and a SSAS will come down to your individual circumstances, and what you want out of the scheme.
If your priority is creating a tax-efficient fund for your future that’s separate from your business, then a SIPP may be preferable. That way, you can save and invest for retirement in a fund that has no relationship with your company or anyone else involved in it.
Equally, if you’re looking to create a retirement fund alongside your fellow directors or stakeholders, you may prefer the joint responsibility of a SSAS. Additionally, you might also want the flexibility to lend money to your business or buy company shares, something that you can only do through a SSAS.
While a SSAS is typically more complex than a SIPP, it can be sensible to take advice first to ensure that everything is correctly arranged and in order, whichever type you end up choosing.
Get in touch
If you’re a business owner in need of help managing your wealth, please do get in touch with us at Rosebridge.
We’re experts in helping entrepreneurs to make the most of their money.
Email firstname.lastname@example.org or call 01204 300010 to speak to us today.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.