Pensions ‘most tax-efficient investment’ for business owners


In the second of our series of blogs on wealth management issues, Graham Gordon outlines why pensions still represent the most tax-efficient investment vehicle for business owners in these challenging times.


If a business owner takes money out of a company, they will get taxed on it, so naturally they are looking for the most tax-efficient strategies. Pensions are still a very tax-efficient remuneration strategy that offer security in a tumultuous economy.


The squeeze on rates of return is still going to be an issue whether your money is in a pension or not, and business owners must look at the long term. However, pensions can still offer a range of short-term benefits too.


Benefiting from SIPP and SSAS


Wealthy individuals can benefit from the flexibility of SIPPs (Self-Invested Personal Pensions) and SSASs (Small Self-Administered Schemes). SIPPs allow people to make a range of different investments, including commercial property. With commercial property currently being picked up at low prices, this becomes an attractive investment as it can be used to generate rental yields and also as a long-term hedge against inflation. For business owners, a company’s own premises could also be bought.


SSASs are attractive because they allow members to make loans to their business. This gives individuals the option to get tax relief on their contributions to the scheme, then loan up to 50 per cent of the fund’s value back to a company. This cannot only benefit the company in these times of weakened credit, but also it means the SSAS receives interest on the loan that is not subject to tax.


New drawdown rules allow greater flexibility


While most people are faced with the choice between annuities and income drawdown when it comes to drawing their pension, wealthy individuals may also consider flexible drawdown. Flexible drawdown was introduced last year and allows people to take as little or as much income as they like from an invested pension fund, as long they can show they are already receiving a secured lifetime income of £20,000 a year and have finished paying into pensions. While withdrawals other than the initial lump sum are subject to tax, the ability to draw large sums of pension income as and when needed has obvious appeal, with some using it to fund property purchases or pay their grandchildren’s university fees.

Tax efficient even if the worst happens


If, unfortunately, you were to die having built up a pension fund prior to the age of 75, having still not taken any benefit, then the whole fund is payable free of all taxes, including inheritance tax, to your chosen beneficiaries.  In a rather morbid way, this is the most tax efficient thing that can happen on the planet because pension contributions get tax relief on the way in and suffer no additional tax charges at all. It must be noted, however, that death benefits suffer a 55 per cent tax charge if benefit has already been taken from the pension.


Of course, there are down sides to pensions and they can be restrictive in terms of releasing value in a pension.  However, they are still the most tax efficient way of making provision for the long-term. And for the wealthy, and for business owners, there is that bit more flexibility in pensions to make it even more attractive.