Pensions benefits you may have missed - Part four
In the latest "Benefits in a pension you may have missed" series, Technical Director John Dowding discusses how an established SSAS can continue to be of real benefit for its sponsoring employer.
“It looks too good to be true”
Dave and Ian have been running a successful industrial moulding business for a number of years and they return a modest but consistent profit. A couple of years ago the business needed some cash to update some of its ageing machinery.
Their adviser recognised the benefits of a SSAS and how this could help the funding of their business. As a result, Dave and Ian consolidated their various pension arrangements totalling just over £260,000 into a SSAS, and a loan of £130,000 was advanced to the business to help with some equipment purchases. The current monthly payment back to the SSAS is £2,500.
Meanwhile being aware of the benefits of renewable energy and how this could benefit their consumption heavy business, the business invested in solar panels. A finance arrangement was set up with a solar panel supplier and there is now £60,000 (including VAT) left on the finance arrangement which cost £1,400 per month.
Whilst affordable, the monthly payments of £3,900 for the existing SSAS loan and the finance arrangement is putting some pressure on cash flow and the directors have asked their financial adviser if they can use the SSAS again to help with these commitments.
A year on, the SSAS is valued at £300,000. This is made up of £220,000 in investments, the loan which has an outstanding value of £70,000 and a cash sum of £10,000.
The maximum loan that the SSAS can advance is 50% of the fund value, ie £150,000. As there is already an existing loan with a balance of £70,000, a further loan of up to £80,000 could be advanced to the company. This would be enough to repay the outstanding finance agreement, but with further repayments around £1,500 per month it will not address the cash flow problem.
The adviser has therefore recommended a consolidation of the existing SSAS loan. This effectively means that the existing loan can be amalgamated with a new loan and spread over a further 5 years.
This would allow the maximum loan of £150,000 to be advanced - £70,000 can be used to repay the existing SSAS loan, £60,000 is used to repay the solar panels and a small sum left over as cash.
The monthly repayment for a £150,000 loan over 5 years (the maximum allowable) and a commercial interest rate of 6% is £2,900. The process has clearly achieved the objective of reducing the monthly commitment. In addition there are a number of other added benefits to this strategy:
- The maximum loan advance of £150,000 means that the business has an additional cash sum of £20,000. The adviser recommends that this is paid back into the SSAS as a pension contribution, typically saving the business £4,000 in corporation tax.
- The pension contribution boosts the value of the pension fund by £20,000.
- The business can settle the outstanding finance and secure ownership of the solar panels of £60,000 including VAT. The company can reclaim £10,000 VAT paid which will create a useful cash buffer.
- The interest rate for the SSAS loan is set at 6% which will provide the pension scheme with a respectable return on its investment. The interest element of the loan repayment can be offset against tax for the business.
- The ongoing funding from the SSAS continues to remove any reliance on the Bank and avoids the directors committing to personal guarantees.
- This is all in addition to the original aim of reducing the monthly credit outgoings from £3,900 to £2,900 – a saving of £1,000 per month.
SSAS in all its glory
This really illustrates the ongoing benefits of a SSAS and how it can continually interact with the business to maximise funding opportunities and tax efficiencies whilst at the same time boosting the value of the pension fund.
The information above is based on our understanding of the legislation applicable to UK Registered Pension Schemes, and HM Revenue & Customs rules. It is provided as a summary only and should not be taken as advice - Morgan Lloyd SIPP Services Ltd and Morgan Lloyd Administration Ltd are not authorised to give financial advice and will not be responsible for any decision or action taken as a result of relying on this information. If you are a retail client you should seek financial advice from a financial adviser who is authorised by the Financial Conduct Authority and/or seek guidance from the Government’s Pension Wise service.