If you own your own business, what kind of pension should you have? You can take out an ordinary personal pension, but some business owners choose to invest in a SIPP (self invested personal pension) or SSAS (small self-administered scheme) instead.
Here, we explain how each of these schemes works to help you decide which might be the right option for you.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
The basics of SIPPs
A self invested personal pension is basically a personal pension that gives you more flexibility about what you invest in. You need to take out a SIPP with a SIPP provider, although you – and not they – decide what the SIPP invests in.
You can read more about what SIPPs let you invest in in our guide What is a SIPP and how does it work?
The small business and the members of the pension scheme can each make contributions to it. Self invested personal pensions are normally more expensive to run than ordinary personal pensions, and so they’re not generally worth it unless you have a pension fund that’s more than, say £50,000 to £100,000 (the fund threshold depends on the amount you’ll be paying in fees).
The basics of a SSAS
A small self-administered scheme is a pension scheme that is set up by the directors of a company. Normally all the SSAS members are also trustees of the pension scheme, which means it’s their responsibility to run it.
Directors who are 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, but each member is viewed as having a share of these assets. This can mean it’s harder to divide the pension if there’s a fall out between the directors.
Unlike a SIPP, a small self-administered scheme is classed as an occupational pension, which means there are slightly different rules that govern it. The small business and the members of the pension scheme can each make contributions to it.
One advantage for business owners is that a SSAS can invest in the directors’ business and can lend money to their company, which a SIPP cannot do. However, that doesn’t necessarily mean it makes financial sense to do so. There are two potential problems of using a SSAS for a loan. The first is that you could be throwing good money after bad by lending to your own company. The second is, do you want to have your retirement fortunes linked to your business in this way?
SIPPs and SSASs in more detail
SIPPS can:
- Be used by anyone (as in, you don’t have to be a company director or family member to join). There are reasons why you might not choose a SIPP, but the rules don’t limit who can have one.
- Invest in ‘mainstream’ investments such as unit trusts and OEICs as well as shares in individual companies. However, they cannot be used to invest in shares in the company owned by the directors.
- Invest in commercial property. This can include any premises that are owned by the 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.
The pension scheme doesn’t have to be able to afford to buy it outright. It can borrow up to 50% of the value of the pension to buy the commercial premises.
SSASs can:
- Only be set up by company directors. They usually only have up to 12 members. These can be made up of directors and family members (even if they don’t work for the business).
- Invest in the directors’ own business. There’s a limit of 5% of the value of the pension fund that can be invested in the business owner’s company. However, if they 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.
- Invest in commercial property. This can include any premises that are owned by the 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. The pension scheme doesn’t have to be able to afford to buy it outright. It can borrow up to 50% of the value of the pension to buy the commercial premises.
- Lend up to 50% of the value of the pension to the business, as long as it is secured on it. This loan would normally be secured on something like an office or factory owned by the business, but it could be something else. 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.
- Invest in assets that may be seen as too risky by a SIPP provider. Most SIPP providers have restrictions and rules about what the pension can invest in and, although SIPPS give you more freedom about what to invest in than ordinary pensions, it doesn’t mean you have a completely free rein.
Running a SSAS
If you’re a company director who’s set up a SSAS, you have to run it. That means:
- Submitting an annual return to the Pensions Regulator
- Registering the scheme with HM Revenue and Customs
- Sorting out tax relief on payments made to the scheme
- Reporting certain changes to HM Revenue and Customs.
You don’t have to do all this yourself if you don’t want to as a number of companies offer SSAS trustee services.
Remember…
The best pension for you will depend on the investment options you want, how much you want to pay, and whether you have a smaller or larger amount to invest. If you’re not sure which one to choose, it may be worth seeking professional financial advice.
A good financial advisor can help you decide which SIPP or SSAS to go for and which investments to hold in it, providing you with specific recommendations based on your individual circumstances.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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