Normally, a pension plan works by members paying contributions to a pension provider, and that provider (usually an insurance or dedicated pension company) invests the money in various forms of investment to provide growth in the fund from which the pension is paid. SSIPs and SSASs provide a way in which the contributor can take some control over the way in which the fund is invested.

These types of schemes provide a useful means of investing a pension fund in a form which could benefit a small business, mainly by the increased range of investments available – often in property of some sort which can be used by the contributor’s business.

 

Sipps

Normal Personal Pension Plans consist of funds that are invested by the pension provider. These investments include things like equities, bonds, and deposit accounts. The contributor has only limited control over what the fund is invested in.

SIPPs were introduced to allow contributors to Personal Pension Plans to have more control over their own fund’s investment. A SIPP is set up under a trust deed. A trustee controls the investment of the fund, under instruction from the contributor. The contributor may be the trustee, but if so, an administrator must be appointed to carry out the investment transactions.

Permitted investments are:

• Stocks and shares traded on recognised Stock Exchanges. This therefore includes equities, bonds and other loan stocks, fixed interest stocks, including preference shares, debentures, warrants, permanent interest bearing shares, and convertible securities.
• Futures and Options relating to securities traded on recognised Stock Exchanges, and relating to currency.
• Shares from:
• Unit Trusts and Investment Trusts.
• Unit linked funds provided by U.K. Life Assurance companies.
• Traded Endowment Policies.
• Deposit Accounts.
• Commercial Property – leasehold or freehold. Borrowing in order to finance the purchase or development of Commercial Property. (But there are restrictions on the borrowing allowed.)
• Ground Rent.
• Individual Pension Accounts (IPAs).

Prohibited Investments are:

• Loans.
• Borrowing for any asset other than commercial property.
• Property may not be purchased from a connected person (i.e. spouse or close relative of the policy holder).
• Property cannot be purchased after the later of:
• Residential property.
• Leisure property.
• Land bordering land owned by the contributor.
• Personal chattels, such as paintings, jewellery, antiques, etc.
• Premium Bonds.
• Gold Bullion.
• OFEX shares.
• Shares not listed on a recognised Stock Exchange.

 

Investing In Property

Because the fund can be invested in commercial property, a SIPP is extremely useful for a small business. The proprietor or partner can take out a SIPP, make contributions, and the fund may then invest that money, (borrowing more if necessary) to buy property for the business. The property is then owned by the SIPP and rented out to the business by the pension fund.

This is particularly useful for an expanding business which needs bigger premises. Note, however, that the property must be commercial property, not residential or leisure property, and that it may not be purchased from a connected person. However, commercial property for these purposes does include development property and agricultural property. The rental income, although not taxable in the hands of the SIPP, must be enough to cover interest paid on any borrowings, and any expenses.

Tax Benefits

A SIPP represents a particularly tax efficient way of providing a retirement fund from an unincorporated business (i.e. one which is not a limited company). The tax advantages are particularly shown when the fund purchases property for the business.

• The contributor gets tax relief at their highest marginal tax rate on the contributions to the plan.
• The rent paid by the business is a valid deduction from profits for tax purposes.
• The rent received by the fund is not liable to tax.