As you may be aware, at Carpenter Rees we have many years’ experience in setting up and administering Small Self-Administered Pension Schemes (SSAS) for our own clients. Whilst we are financial planners first and foremost, SSAS do form an important part of many of our client’s financial plans. Set out below is a typical case study demonstrating how the use of SSAS can assist our clients in their financial plan.
Husband and wife team, Roy and Janet have a business which makes and sells garden furniture. The business has been doing so well in recent years that their sons Alan and John have joined the business.
Roy and Janet have indicated that they intend to hand the business over to their sons in stages, as they would gradually like to take more time out of the business to enjoy travelling together and would like to replace some of their earned income with pension income.
The business operates from a rented warehouse and the landlord has recently offeredto sell them the building for a very attractive price. The bank will lend them most of the money, but the interest rate isn’t that attractive, and, in any event, they need the balance of the purchase price to support the cashflow of the growing business.
Roy and Janet have a variety of small personal pensions and some previous employer schemes from before they started their business.
We advised them to establish a SSAS for the business with the primary aim being to buy the property using their pension money and over time, to pass the property ownership to their sons. All four of them join the SSAS and Roy and Janet’s pensions are transferred in, along with smaller sums from personal pensions owned by Alan and John. As a result, the sums available are more than sufficient to purchase the property from the landlord.
Following the purchase, the rent that was formerly paid to the landlord is now paid to the SSAS, the business gets tax relief on the rent it pays the SSAS and the rent is received in the SSAS tax free. In addition, the rent received is available to fund the retirement income payments for Roy and Janet.
Roy and Janet are aware that they are each entitled to draw 25 per cent of their share of the pension fund tax free, but instead of taking it all in one go, they choose to draw it in stages over the coming years, as this is more tax efficient.
Now that Roy and Janet are drawing an income from the SSAS, the business no longer needs to pay their full wages and in lieu of this, it makes pension contributions for Alan and John.
As the assets of a SSAS are held on a common trust basis, this means that all members benefit equally from the investment returns on all the assets. However, in liquidity terms, the sons’ pension contributions and the rent payable from the business are used to make the payments to Mum and Dad. This means that Alan and John will gradually increase their share of the fund, gaining a larger share of the property as their parents’ interest diminishes because of their retirement drawings.
The result is that the value of the property has been passed tax efficiently to the next generation.
This is just one example of the effective use of such a scheme in a family business environment. We have experienced many other scenarios so if this is something you would like to consider, please do contact us.