Directors of companies can use their small self-invested pension scheme to boost their business potential and still ultimately benefit when it comes to retiring says Richard Leach
The last budget removed carry-forward and carry-back reliefs on pension contributions, but directors can still use alternative pension schemes and benefit their own business in the process.
While many individuals were probably advised by their advisers to maximise their pension contributions and use up any remaining reliefs before 5 April 2001, the key date is actually 31 January 2002 ' the deadline for 2000/2001 tax returns. Certain contributions reported on that tax return can be carried back.
Not everybody will be in a position to use up their unused relief and, as a result, any tax advantages will be lost forever. However, there are other vehicles that can be used to ensure your pension arrangements will be adequately funded for maximum return.
If you are a director of a business, you should consider your current pension arrangements and compare them with either an executive pension plan (EPP) or a small self-administrated pension scheme (SSAS). This is particularly relevant if you are also a shareholder.
Such plans have been specifically designed for directors and do not conflict with any arrangements you make for your staff. A business can provide a number of different pension arrangements, and running an EPP or SSAS as well as a stakeholder for staff is allowable.
Both EPPs and SSAS are classed as occupational schemes in that they are sponsored by an employer. They are generally designed on a defined contribution basis but are allowed to fund for a two-thirds final salary pension. The majority of contributions are paid by the business instead of through your own salary.
This has a distinct advantage for employers, as the allowable funding rates are greater than the normal Inland Revenue bands for personal pensions. The top rate of contribution to an EPP or SSAS can be as high as 244% of current salary, subject to the earnings cap, compared with 40% for a personal pension.
Any such contribution is also paid by the company out of pre-corporation tax profits, as opposed to out of salary and is not subject to employers National Insurance. If you make the payments as an individual, your business will incur an additional 11.9%.
The main differences between the two types of scheme are that the investment holdings within an EPP tend to be insurance-based funds with the investment company providing the administration and trustee position. An EPP can be converted to an SSAS with Inland Revenue approval, which will allow a wider range of investments. Both EPPs and SSASs can be used not only to provide a pension but also to assist a business. Both vehicles can, with Revenue approval, make loans to the company for specific business purposes such as buying a new piece of equipment.
Figure 1 shows allowable cashflow payments for a company whose SSAS has made a loan to the company. The advantage of this scenario is that, although the loan has to be made on a commercial basis, the interest is being paid into a pension scheme and therefore will be for your eventual benefit. To prevent abuse of such an arrangement, the scheme can lend only up to 25% of its total funds and all loans have to be notified to the Inland Revenue and approved by the trustees.
More interestingly, an SSAS can be used to buy the business premises with the assistance of a commercial mortgage in certain circumstances. From a business perspective, your SSAS then becomes your landlord so that you not only pay contributions into the SSAS but also your property rent, both of which will be allowable for corporation tax.
Figure 2 shows allowable cashflow payments for a company whose SSAS owns the business premises. Realistically, not many funds would have sufficient capital to buy a business premises outright.
However, there are provisions for a fund to borrow money to meet the purchase price. Figure 3 shows allowable cashflow payments for a company whose SSAS owns the business premises, funded in part by a commercial mortgage. It is the SSAS that has the liability to pay the mortgage and therefore the interest payments are not allowable against the firm's corporation tax ' although the rental payments are.
Again, the Inland Revenue has strict rules to govern such transactions in that the scheme can borrow only up to 45% of the value of the fund in addition to the equivalent of three years' agreed contributions.
A business can have any number of EPPs but only one SSAS. From an employee benefit perspective, you can use an EPP to enhance the pension benefits of your key employees as a top-up scheme. However, you should also note that as occupational scheme EPPs and SSASs may fall under the Pensions Act regime.
Both types of scheme have to submit accounts to the Inland Revenue with the new Self-Assessment Tax Return (SA970), which effectively means annual audited accounts.
There must be an actuarial valuation every three years to ensure that you are not over funding and determine the maximum allowable contributions for corporation tax purposes.
Therefore, to make the most of pension arrangements, take the opportunity to discuss the matter with your assignment partner and have your situation assessed to identify the best type of scheme for you as a director.
Personal pension plans are fine but they do not allow you the flexibility of an EPP or an SSAS and cannot be used as a tool to assist the development of a wider business.
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