SIPP or SSAS Commercial Property
A growing number of company owners are setting up small, self-administered schemes to take advantage of a rule that allows businesses to borrow from pension assets
SIPP v SASS
Auto-enrolment has pushed employers to provide a pension for their employees, but a business owner may want more flexibility in the way they save for their own retirement.
While the merits of self-invested personal pensions (SIPP) are well-known, small owners could find the specific benefits of a small, self-administered scheme (SSAS) enable them to save and boost their business.
There is estimated to be £100 billion saved into SIPP’s but the amount saved in SSAS’s is far less.
A growing number of company owners are setting up small, self-administered schemes to take advantage of a rule that allows businesses to borrow from pension assets especially where business owners are struggling to access credit from the banks.
Ability to lend
A loan facility is the distinguishing factor between a SSAS and SIPP. Members of the SSAS can lend up to 50% of the money in their pension back to the company so long as it is secured. The security can be a business premises, a personal asset or another company.
Usually, the security is a commercial property but you can secure the loan against other things, although the pension scheme will not want to own things like art or classic cars because they are too hard to value. Wattsford Commercial Finance does have specialist lenders that focus on the intellectual property of a business to secure against.
Although a SIPP may be more restrictive, the administration of the pension is taken out of the hands of the business owner whereas under a SSAS it is the business owner who is accountable for adhering to the pension rules.
HM Revenue & Customs does audit SSAS schemes to ensure business owners are not taking advantage of the rules and a general rule of thumb is [the business owner and SSAS trustee] has to act as if the scheme is at arm’s length and make decisions objectively.
Business Premises
SIPP’s do not have the ability to act as a loan facility but investors in both SIPP’s and SSAS’s can invest in commercial property.
Individuals can place their business premises into their SSAS and the pension scheme rents the property back to the business, meaning the rental income paid goes back into the pension to be reinvested and the rent paid reduces the taxable income the company pays.
Small business owners can use SIPPs to do exactly the same thing. In both cases the rental income must be set at a reasonable, market level.
Investors in SIPP’s and SSAS’s may not have sufficient funds to purchase a commercial property outright but the rules allow the pension holder to borrow up to 50% of the value of the pension pot to fund the purchase.
The lender will lend to their normal LTV maximum so long as they do not exceed 50% of the net asset value of the funds so in general up to 65% LTV maximum. SIPP’s may be more restrictive in their limitations to commercial property deals and their trustees may turn down loans that are viewed at too “high” lending rates. SIPP providers may also include certain conditions on high risk property that they don’t want to take on because of the risk and the administration.
Eligibility
Anyone can set up a SIPP, an individual, a business owner or a company but not everyone can set up a SSAS. Only company directors can set up a small, self-administered scheme and only a limited number of 12 people can join the scheme, including the founder.
Other members will typically be other company directors or family members if it is a family-run business.
Investment
The investment of the pension money saved through a SSAS or SIPP is the responsibility of the person saving into the pension.
This responsibility can be delegated to an independent financial adviser or discretionary fund manager, both of whom will invest the money according to a risk profile.
Both SIPPs and SSASs can invest in commercial property and SSASs can make loans but they also have added investment benefits over SIPPs
A SSAS can invest up to 5% of the pension fund value in the shares of the company and if the business has more than one company under it shares can be bought in multiple companies as long as the total invested is no more than 20% of the fund.
In theory a SSAS could own 100% of a company’s shares so long as it does not exceed 5% of the fund value of the pension. This is another way for money to be loaned to the business from the pension to the benefit of the company.
Administration
SSAS’s are, as the name suggests, self-administered meaning that the company directors who set up the scheme are also the trustees. This is different to SIPP’s where the pension provider is the trustee.
A self-administered pension can be deemed “riskier” as it allows directors to invest the pension in assets that a SIPP, vetted by its trustees would not allow, such as an overseas commercial property, or the client’s own business.
SSASs are set up by a company but it is the individual’s pension scheme, they can take advice on how to run it but it is ultimately their decision.
A SIPP is owned by a pension provider who sets the rules and is usually more restrictive.
A SSAS can invest up to 5% of the pension fund value in the shares of the company and if the business has more than one company under it shares can be bought in multiple companies as long as the total invested is no more than 20% of the fund.
In theory a SSAS could own 100% of a company’s shares so long as it does not exceed 5% of the fund value of the pension. This is another way for money to be loaned to the business from the pension to the benefit of the company.
