Many businesses are struggling with cash flow at the moment; Steve Woodham (pictured above), senior pensions manager at financial experts Old Mill says pensions could offer a solution.
“If your firm already owns a commercial property, selling it to your pension scheme could provide that cash injection you’re looking for,” he said.
“You can purchase a commercial property either with a SIPP or a SSAS. The pension can either buy the property outright, or if there are insufficient funds in the pension to do that it’s possible for the pension to take out a mortgage to facilitate the purchase. The pension then lets the property back to the business.
“The rent will then help pay off the mortgage, or if the pension scheme bought the property outright, will just be further cash and growth to the pension fund.
“And because it’s a pension, and therefore tax-efficient, the rent paid into the fund is not subject to tax, and it will pay no tax on any increase in the value of the property either. But, if you are renting the property back to your own business, the rent is still a tax-deductible expense.”
He says that, even if the price of the property you want to buy is higher than the value of the pension, it may still be possible to purchase it with the pension.
“As mentioned earlier, your pension can get a mortgage, which can assist with the purchase, and it’s also possible to combine pension schemes together, contribute to the pension so it has the funds, or do a combination of all three.”
For example – suppose a company has three directors and the total value of the firm’s SSAS is £140,000.
Each director then contributes a further £20,000 gross, bringing the total in the pension to £200,000. The pension scheme then takes out a mortgage for £100,000 and so can buy the firm’s commercial property for £280,000 thereby giving the business a valuable cash injection.
The business then rents the property from the pension scheme and this money is used to pay off the mortgage.
When the property is eventually sold, the proceeds will go straight back into the SSAS, minus any outstanding mortgage.
Woodham continues: “While we are looking at businesses buying their own premises here because it’s a way of relieving cash flow issues, SIPPs and SSAS can buy any commercial property; it doesn’t have to belong to your own business, and then whichever business uses it will pay rent into the pension.”
He says that while buying a property with a pension has its advantages, it is a complex area and advice should be obtained before proceeding. It’s also important to remember that the main purpose of a pension is to fund an individual’s retirement. There are also risks to consider. “If the only asset in your pension is a property, and you are near retirement, it will be difficult to create liquidity to pay out an income or the tax-free lump sum, so it’s generally advisable to have a diversified portfolio.”