Despite their lack of flexibility, Self Invested Pension Schemes (SIPP) are often the defacto choice for pension planning, but oftentimes the less well known Small Self-Administered Scheme (SSAS) may be the better option for SME owners. In today’s financial climate, banks continue to set a very high bar with their SME business loan lending criteria, meaning a SSAS can often provide an alternative injection of cash for small businesses to help them grow to their full potential.
To illustrate this, let’s consider “Johnson’s Instruments Ltd” who manufacture kitchen gadgets. Following advice from their financial advisor, they had created a SSAS to consolidate the directors’ previous pensions into one single trust.
Trading had been tough for the past few years, so the opportunity to purchase their trading premises had come at a really difficult time. The directors had initially approached their high street bank for loans for small businesses, but it had been refused, forcing the business to secure corporate financing with a high rate of interest from a second-tier lender.
With burdensome monthly repayments, the directors had changed their accountants and business advisers, and restructured the business, appointing their lead business developer to the board.
Profitability had subsequently increased, and they had been able to extend their building. They now however, faced the need to invest heavily in new equipment so that parts manufacturing could be brought in-house.
The high street bank, who had previously assisted with factoring, were now unwilling to add to Johnson’s Instruments SME business loan further since their only security was the business property, already charged to the second-tier lender.
On approaching their financial adviser again, two SSAS-funded solutions were considered:
OPTION 1: SSAS Loan Back
A SSAS loan back to the sponsoring company would often be the selected source of corporate financing, but it requires a first charge security so in this instance it had to be discounted as the company’s premises were already charged to the second-tier lender.
OPTION 2: Part Purchase
Given the lack of a first charge security, the part purchase of the company’s business premises would be the other option, and indeed the one that was chosen. Let’s look at how this was achieved:
The premises was formally valued at £1m by a RICS qualified surveyor, and there was around £400,000 of outstanding debt to the second-tier lender. The surveyor valued the premises at £74,000 p.a. on the rental market.
New member with transfers in
The fund only held SSAS investments of £420,000 for the main company directors, but when the newly promoted director was offered membership of the scheme he brought with him £180,000 of pension transfers.
The financial adviser managed the transfer process and arranged all the paperwork with the SSAS professional trustee to effect the partial acquisition. The scheme then acquired a 55% interest in the property, which it then jointly owned with the company, as a SSAS investment.
The proceeds from the sale of its 55% share of the premises were used by the company to redeem its borrowing from the second-tier lender, who therefore released their charge on the property. There were still £150,000 excess after the redemption.
The business then entered into a lease for the proportion of the property owned by the pension scheme. It pays £40,700 p.a. into the pension scheme, which is a deductible trading expense and tax-free income into the SSAS.
The surplus property proceeds over the original mortgage debt repayment could be used to purchase the equipment the business needed to bring manufacturing in-house.
Cashflow was also improved as the rent payments were lower than the expensive mortgage repayments the business was previously paying to the second-tier lender. Furthermore, with the rental payments now being made into the SSAS pension commercial property, the scheme and members benefit, rather than benefiting a third-party lender.
And finally, bringing the new director into the scheme meant they were now even more engaged with the business now that their loyalty had been recognised and rewarded.
For financial advisers, a SSAS can be a very effective planning tool, being a flexible product that can help grow and develop their client’s business: an alternative to trying to secure SME business loans. Where multiple members are in a single scheme it also offers the flexibility to alter allocations of the property between individuals, for example in such cases where benefits come into payment.