Magazine article Management Today

The Do-It-Yourself Pension Plan

Magazine article Management Today

The Do-It-Yourself Pension Plan

Article excerpt

For those with the right qualifications, there are real benefits -- and considerable flexibility -- in utilising the tax advantages of pensions without handing over control of the investments.

Would you pay a life assurance company [pound]33,032 to look after a [pound]100-a-month nvestment in a 25-year personal pension plan? Stop laughing, because that is what a recent survey of charges on personal pensions, carried out on behalf of Money Marketing magazine, found to be a far from exceptional case.

No wonder, then, that an increasing number of the 4.5 million self-employed and an unquantifiable number of directors of small to medium-sized companies are turning to Self Invested Personal Pension Plans (SIPPs) and Small Self Administered Schemes (SSASs). 'There's a real need for high net worth individuals to separate the tax advantages of pensions from the investments,' says pensions expert Marc Ainscough of independent consultants Fraser Smith. 'The big advantage of SIPPs and SSASs is control of both investments and charges. Anyone who is making pension contributions of more than [pound]10,000 a year should consider a SIPP or a SSAS,' he says.

THE GROWTH OF SSASs

Year           Cumulative applications
1986-87                      20,510
1987-88                      24,425
1988-89                      28,299
1989-90                      32,337(1)
1990-91                      34,833
1992-93                      38,257
1993-94                      39,388
1994-95(2)                   41,171

(1)New statistics system introduced

(2)As at 24th February 1995

Source: Inland Revenue

Michael Otway of stockbroker Carr Sheppards concurs. 'The appeal of SSASs for controlling directors is that it gives them the opportunity to create a reserve fund which can be used to finance the future growth of the business,' he says. 'They can buy property which can be used in the business or they can build up cash deposits which can be loaned back to the company at a later date.' Both SIPPs and SSASs also have the advantage of flexibility; if the fund managers don't perform you can simply give the investment management to someone else. Nor do you have to pay hefty penalties for the privilege.

SSASs are a variation on the occupational pension schemes operated by large companies and subject to similar legislation, which allows a generous ceiling on the amount which can be paid into the fund. Employees can contribute up to 15% of their earnings, but the company can pay considerably more, depending on the ages of the beneficiaries -- provided that the benefits, when they come to be paid, do not exceed Inland Revenue limits (broadly, a pension of no more than two-thirds of final salary). They are commonly set up by controlling directors of small to medium-sized companies and often used as a place to 'park' profits in good years in order to be able to take a pensions holiday when times are tough. The major advantage of SSASs is that the company can invest in its own property through the pension fund and the fund can also make loanbacks to the company, albeit at a commercial rate of interest. Regulations restrict property investments to no more than 25% of the fund for the first two years and 50% thereafter.

James Minter, 47, who runs a south London construction business, has used a SSAS in a number of ways. 'The pension fund provided a mortage for the company to buy premises and a building yard, and we eventually sold the property to the pension fund. …

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