SIPP v SSAS pensions – if you have your own business, which pension is best?

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If you own your own business, what kind of pension should you have? You can take out an ordinary personal pension, but some company owners choose to invest in a SIPP (self invested personal pension) or SSAS (small self administered scheme) instead. Find out how they work.

The basics of SIPPs

A self invested personal pension is basically a personal pension that gives you more flexibility about what you invest in. They can have higher charges than ordinary pensions.  You 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 my article called Self invested personal pensions (SIPPs) – is the DIY approach right for you?

The small business and the members of the pension scheme can each make contributions to it.

SAVVY TIP: 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 SSAS

A small self administered scheme (SSAS) is a pension scheme that is set up by the directors of a company. It is run by ‘trustees’ who are often scheme members (i.e. the directors), although there are also specialist companies that can act as trustees.

SAVVY TIP: Company 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.

SAVVY TIP: 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, according to Claire Walsh, who’s a chartered financial planner with Aspect8 in Brighton and Head of Advice at Unbiased: “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 SSAS 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.

SAVVY TIP: 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.

SAVVY TIP: 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.

SAVVY TIP: 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.

SAVVY TIP: You don’t have to do all this yourself if you don’t want to as a number of companies offer SSAS trustee services.

Pooled or family SIPP

Most SIPPs are taken out by individuals, but you can have a pooled or family SIPP. This can be used by business partners (as well as family members). You don’t have to run a business together to take out a pooled SIPP. It can be useful because of the economies of scale. For example, if you want to use the SIPP to buy a commercial premises because the pooled scheme owns the property.

Related articles:

How is your SIPP (self invested personal pension) protected?

How much should I save for retirement? How much should I pay into my pension?

Pensions jargon explained – what pension terms mean

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