Posted by Simon Misiewicz on 15th July 2014
Would you like to invest in property whilst getting a tax rebate?
Would you like to build and control your pension pot?
In this series of articles I am going to demonstrate the tax advantages of investing into a pension fund that still allows you to invest in property. Albeit the properties you will be allowed to invest into will be commercial in nature.
The types of commercial properties that will be allowed are as follows:
- Factories / warehouses
There are several elements to this series as follows:
Part 1 – Pension Overview & SIPPs
Part 2 – SSAS pensions and loan backs
Part 3 – Business & employer contributions
Part 2 – Small Self Administered Scheme (SSAS) pensions and loan backs
Now we have identified the treatment, here are a few ways that you can apply it to your tax pains.
If you are an employee or a business owner then you can ensure that an element of your taxable income is invested into a property related pension (SIPP / SSAS).
A percentage of your pay is put into the pension scheme automatically every payday. In most cases, your employer and the government also add money into the pension scheme for you.
The money is used to pay you an income for the rest of your life when you start getting your pension. You can usually take some of your workplace pension as a tax-free lump sum when you retire.
If the amount of money you’ve saved is quite small, you may be able to take it all as a lump sum. 25% is tax free but you’ll have to pay Income Tax on the rest. (2)
A SSAS can loan money back to your limited company. That way you get the tax credit for investing into a SSAS and you can then loan up to circa 50% of the SASS back to the company. Let us look at this in more detail:
- £50,000 invested into a commercial property or business
- £10,000 tax saving at 20% of the original £50,000
- £25,000 loan from the SSAS pension
The true amount of money that has been invested (no longer in your pocket for the foreseeable future) is as follows:
- £50,000 into the SSAS pension
- (£10,000) less tax saving
- (£25,000) loan from the SSAS pension
- £15,000 amount from your pocket
The loan interest is a tax deduction for the purposes of the limited company but is a tax free income for the pension fund.
You are making money from money.
Taking cash out from your pension
If you’re a member of a company or public sector scheme and your pension pot is worth £10,000 or less you may be able to take all your pension pot as a lump sum if you meet the following conditions:
You must take all your pension pots with the same pension scheme as a lump sum – for example if you’ve worked for different councils you may have several pension pots in the local government pension scheme.
You haven’t transferred any funds out of the pension scheme in the last three years.
You’re not a ‘controlling director’ – or someone connected with a controlling director – of an employer that participates in the pension scheme.
You belong to more than one company or public sector scheme for the same job and your total pension pots are worth £10,000 or less.
If you meet the first 3 conditions but not condition 4 you may still be able to take your whole pension pot as a lump sum but you’ll need to check with your scheme administrator. (4)
Total of all pension pots worth £30,000 or less
If all your pension savings in all the pension schemes are not worth more than £30,000 you may be able to take all your pension pots as a lump sum. You can do this even if one or more of your pension pots is worth more than £10,000 or if you’ve already started to take one of your pensions.
This type of lump sum is called a ‘trivial commutation‘ or ‘trivial‘ lump sum. To be paid this type of lump sum you must:
- take all the savings in all of your pension pots within the same pension scheme as a lump sum
- have your pension savings in all your pension schemes valued on the same date which must be no more than three months before you take your first trivial commutation lump sum.
If you belong to more than one pension scheme you don’t have to take a lump sum from all of your schemes. For example, if you’re a member of two pension schemes you can take a trivial lump sum from one scheme and a pension from the other scheme.
If you are taking a trivial lump sum from more than one of your pension schemes you must take all the trivial lump sums within 12 months of the first lump sum payment.
Valuing your total pension pots
The rules for valuing your pension pots depends on:
- whether or not your pension has started to be paid
- when your pension started
- the type of pension scheme you belong to
The valuation that you get for a trivial commutation lump sum payment will often be different to the valuation for taking a pension.
Valuing your pension pot before your pension has started
The value of your pension pot in a defined benefits arrangement is your promised pension multiplied by 20. If your pension scheme gives you a lump sum without having to give up (‘commute’) your pension you also need to add on the value of this separate lump sum.
For example if you’ve built up a pension of £500 a year and your scheme also gives you a lump sum of your pension multiplied by 3, your lump sum will be £1,500. Your pension pot is valued as £11,500.
(£500 x 20) + £1,500 = £11,500.
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