Background
ABC Ltd, a successful fine‑wine importer and distributor, is owned by Directors John Smith and Simon Jones. With forecast profits of £150,000, the business is growing but is constrained by limited warehouse space. Their landlord offers the neighbouring vacant property for £600,000, requiring a fast sale.
Both Directors also have modest pension values - £185,000 (John) and £165,000 (Simon) - and want to improve their long‑term retirement planning.
Solution: establishing a Small Self‑Administered Scheme (SSAS)
ABC Ltd establish a SSAS pension scheme, allowing the Directors to pool pension funds and use them strategically to support the business.
- ABC Ltd establish a SSAS to receive:
- Transfers from both John and Simon of their existing pensions, which have a combined value of £350,000.
- Gross employer contribution of £100,000, split equally between John and Simon.
- The SSAS bank account now contains £450,000 in cash, which can be put towards the purchase. This leaves a further £150,000 to be raised to buy the premises.
- The SSAS is permitted to borrow a maximum of 50% of the net fund value = £225,000. However, they only need to borrow £150,000 and the Directors speak to their bank manager who agrees to advance a loan to assist with the purchase.
- The loan will be over ten years on a capital and interest repayment basis and will be secured on the property with a first legal charge.
- ABC Ltd agree to pay a lease to the SSAS at an Open Market rent of £40,000 p.a. The trustees use this rent to service the loan.
Benefits
Benefits for the Directors
- Both Directors now have a pension scheme which is in their control and is actively helping their business.
- As Directors, they like to be in control of their affairs and their company’s affairs.
- Now they have the SSAS under their control, providing:
- greater investment flexibility (they are trustees too)
- more benefit options open to them (they choose when and how).
Tax savings and business advantages
- ABC Ltd has reduced its corporation tax bill by £20,000 (20% of the £100,000 contribution).
- The company continues trading successfully and makes significant contributions for the Directors, reduces Corporation Tax and enhances the Directors’ retirement plan.
Long-term retirement flexibility
- In the future, Simon Jones elects to reduce his working hours. Accordingly, he reduces his salary and compensates by drawing regular Pension Commencement Lump Sums (PCLS) via the SSAS.
- He also elects to draw a small portion of his pension entitlement.
- He continues working for the business as a Director and retains shares.
- Large future dividends in successful years mean Simon can cease PCLS withdrawals and drawdown payments, which he can then restart as and when he requires the funds.