How SSAS & SIPP can help prevent working capital shortage resulting in halted pension contributions for directors

22 Aug 2024

First seen on Money Marketing

I’ve spent most of my career working in large organisations, where you can take the arrival of the monthly pension contribution very much for granted.

However, I have recently noticed that, in small firms, pensions affordability can be a real issue – especially for the directors and most senior staff. In times when working capital is tight, directors may be expected to waive any contractual right to a pension contribution as part of putting their ‘shoulder to the wheel’ to keep the company trading through a rough patch.

There’s a role for advisers in helping such firms keep the pension contributions flowing. They can help reduce the company’s corporation tax bill by ensuring pension contributions are accounted for as a legitimate business expense in year-end calculations. And it’s a noble goal for the company to want to ensure that, at the end of a long career, its directors should be rewarded with a comfortable retirement income. Both Sipp and Ssas can offer solutions here.

SIPPs for commercial property

A good example of using a Sipp in this way is where a company operates from a commercial property, such as an office or storage facility, which it owns. One or more of the directors may already have a Sipp with earlier pension contributions in it, and the company may make further pension contributions now, cognisant of the fact it will shortly get the cash back again.

The Sipp then buys its premises from the company and leases it back so the business can continue operating from the same place. The Sipp is allowed to gear up by 50% to help it buy that commercial property. So, with Sipp-held cash of £300,000, it could borrow a further £150,000 from a bank and purchase the property for £450,000. That money is then the company’s and can be used as working capital to fund the business.

The help of a specialist surveyor will be needed to ensure the purchase price fairly reflects that market value, and to set a proper commercial rent. Going forward, that rent will be paid into the pension scheme, potentially swelling the director’s retirement assets and qualifying as a recognised business expense. A specialist tax planner will also be able to advise on any tax implications for the company on the asset’s disposal in this way.

Using SSAS to pool retirement savings

Ssas is quite different from a Sipp, being a group occupational scheme for up to 11 members. Typically, Ssas is for the company directors but can include other workers and also family members. It enables the group of people controlling the company to pool their retirement savings together, increasing their ammunition for larger purchases.

This pooling of the assets can be a useful way of passing company property down the generations within a family business. When the time comes to pass the torch, the head of the family can take non-property assets out of the Ssas for their retirement. This leaves the Ssas as the pension scheme for the younger generation, and it leaves the Ssas to own the commercial property, leased to the business that is now run by the younger generation.

There is much more you can do with either a Ssas or full-service Sipp, but my key takeaway is that if a client is thinking their business can’t afford pension contributions, then there are lots of opportunities to open their eyes to the options.

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