CUSTOMISED

PENSIONS, SIPPs & SSASs

The most tax efficient investment, designed to provide future income, they can also be used to buy commercial property and lend money to a business.

For most people, the simplest way to think about a pension is to compare it to a savings account in a bank, but a savings account which you can only access from age 55 (under current pension rules).  One of the most important things is to understand how much you need to save to achieve a desired income in retirement. 

Given the myriad of changes that have occurred with pensions in recent years, it is not surprising that many people are confused.  However, despite all the changes, one thing remains the same; pensions are still the most tax efficient investment you can make. 

All pension contributions are made before income tax is deducted, whether the contributions are made by you or by your employer.  If you make payments into a pension scheme out of your net income the pension scheme will reclaim any basic rate tax you have paid on the pension contributions, on your behalf.

Pensions can be made to work for you in several ways, for example, they can be used to buy commercial property which may be rented back to your own company at market rates, the rental income is then paid into your pension fund tax-free. 

Alternatively, you can borrow up to 50% of the value of your pension fund to inject money into your company, for example if you require additional cashflow for investment purposes.  The interest rate is set by HMRC at 1.0% over Bank of England base rate, which may be more competitive than borrowing from a high-street bank.  The repayments on the loan are repaid back into your pension fund tax-free.

Case Study - Meet Emma and Andy

Emma and Andy own an arable farm and are members of a Family Pension Trust. The farm is a family business, passed down from previous generations. The farm has 1,500 acres of land that includes an unused, isolated field of 25 acres, which their neighbour Ted, is interested in using for grazing and would like to enter in to a farm tenancy.

The majority of the Family Pension Trust assets are held in a common investment fund.  Recent volatility in equity markets have worried Emma and Andy, who are now looking to find alternative investments to remove as much investment risk as possible.

Following a meeting, it was suggested that they purchase the field and lease it back to Ted through their pension.  Although investment returns from land are typically low, the need for land for development locally means that there could be opportunities to develop the land in the future.

To finance the purchase of the land, the investment portfolio was sold and the cash was used to buy the land, which was then registered as an asset of the pension scheme.

In the event of the death of Emma and Andy, their share of the pension scheme could be designated to provide death benefits to the surviving members of the Family Pension Trust or their children, so the land remains part of the pension scheme without having to be sold.  This way pension wealth can be retained in the scheme for future generations.