In the current economic climate many small companies are facing difficult times. There are many different ways in which your pension can help release much-needed cash. Whichever route is chosen, you should bear in mind that you could be exposing your pension arrangement to the fortunes of your business, as one of the little known advantages of having money within a pension arrangement is the potential protection it provides from creditors.
The obvious way to realise cash from your pension arrangement is for it to start paying benefits. So, if you have not already drawn a tax-free lump sum and are over the age of 50, then typically 25% of your pension fund could be paid out alongside a regular pension to be paid annually in advance. But if you are already drawing a pension it is possible to arrange for an increase in the amount that is being paid out.
However, if your scheme is a self-invested personal pension (SIPP), or your company has a small self-administered pension scheme (SSAS), there are other ways of using pension monies without commencing benefits.
Subject to certain conditions, a SSAS - but not a SIPP - can lend up to 50% of the scheme value to your company. Typically, for a loan to be authorised, it must be granted on a capital repayment basis for a maximum of five years and with interest of at least 1% over base. Interest and capital must be repaid in instalments. Authorised loans must also be secured with a legal charge. This must be a first charge, such that if your assets are already securing debt from a bank then this route may not be available.
The obvious way to realise cash from your pension arrangement is for it to start paying benefits
Both SSAS and SIPP can invest directly in your company by acquiring equity. In principle, the whole of a SIPP could be used to invest in your company whereas a SSAS is restricted to investing 5% of its assets in your company. However, health warnings beyond the usual ones about investment risk are needed. In particular, one area of complexity is the possibility of tax charges arising if the company itself purchases items such as pride in possession articles or residential property.
If these assets are held directly by a pension arrangement they will typically be subject to tax charges of at least 55%. For these purposes, the Revenue treats an equity holding in an unlisted company as being an indirect investment in the underlying assets of the company. If, for instance, your pension arrangement was a 50% shareholder in your company, and your company acquired a car for £10,000, the pension arrangement would be treated as having acquired 50% of the car. The Revenue would treat this as an unauthorised payment and your pension arrangement would be subject to a tax charge.
SIPPs and SSASs can also purchase assets from their members or their companies. So if a member or a company requires cash but does not want to sell assets to a third party, selling to the pension arrangement can be a useful way of realising cash.
Beware that the rules on how your pension assets can be used are stringent as the Revenue do not approve of pension arrangements being used for purposes other than providing retirement benefits. Thus, any unauthorised payments made from a pension arrangement will incur high tax charges, starting at a minimum rate of 55%.
For more information about pensions visit www.barnett-waddingham.co.uk
