Case study 06.01.2009
Read our case study on income planning to find out how a company director, close to retirement and with little pension provision, can start funding for retirement.
Read More >>>Small Self-Administered Scheme
Business Continuity Planning
Transferring the business
The primary reason to establish a pension scheme is to provide financial security in later life. In addition, a small self-administered scheme can also enable you to pass your business to the next generation in a tax-efficient manner.
The following example shows why a Rowanmoor Pensions Small Self-Administered Scheme (SSAS) should be an integral part of your business continuity planning.
Duncan and Jane have a successful business and want to be able to hand it over to their children. The company has made significant profits in the last few years and this year it has a gross profit of £700,000. However, Duncan and Jane have never made any pensions provision and would like access to that money.
| Company year end profit | £700,000 |
|---|---|
| Less corporation tax at 26% | £182,000 |
| Net profit | £518,000 |
After discussions with their advisers and their children they agree that the company should set up a Rowanmoor Pensions SSAS and make a pension contribution of £600,000 on behalf of Duncan and Jane who should immediately retire.
| Company year end profit | £700,000 |
|---|---|
| Less contribution | £600,000 |
| Less corporation tax at 21% | £21,000 |
| Net profit | £79,000 |
As the contribution is made in the year of full crystallisation, the annual allowance does not apply.
Duncan agrees to stay on as chairman for further five years. Instead of drawing a salary of £40,000 this amount will be put into the pension scheme on his behalf along with the saving that will be made on employers' national insurance of £4,421 p.a.
| Salary | £40,000 |
|---|---|
| Employer national insurance | £4,421 |
| Employee national insurance | £3,799 |
| Employee income tax | £6,913 |
Duncan will not incur any national insurance or income tax on the contribution paid to the SSAS on his behalf. The company will receive corporation tax relief at its highest rate, assuming this to be at 21% this totals £46,640 over five years.
From the £600,000, Duncan and Jane draw £150,000 tax-free cash (pension commencement lump sum) between them. The remaining £450,000 will provide them with a joint pension of about £27,000 p.a.. Each year Duncan can draw further tax-free cash of £11,105 (25% of £44,421) for the five years he is chairman.
It is agreed that after five years, provided the company continues to make a good profit, a further contribution of £500,000 will be made to the parents' pension fund. At the same time, Duncan and Jane will give the company shares to the children. This will be treated as a Potentially Exempt Transfer (PET) for inheritance tax purposes. The children will take control of the business and assuming a corporation tax rate of 24.5%, the company will receive tax relief of £122,500 on the contribution.
The PET is fully exempt from inheritance tax provided that Duncan and Jane do not die within seven years of making the gift. If death occurs within seven years of making the PET then taper relief may apply depending on when death occurs. The family agrees that as the PET will be in excess of the nil rate inheritance tax band, life assurance should be taken out on Duncan and Jane's lives to protect the gift against any potential inheritance tax liability.
By using the Rowanmoor Pensions SSAS:
- a pension is provided for the parents giving them financial security in retirement;
- the company will receive corporation tax relief on the contributions paid over five years of £321,390;
- the national insurance saving is £22,105 for the company and £18,995 for the individuals;
- there is a saving on income tax of £34,565;
- the children take control of the business allowing their parents to step down from the day-to-day demands of a successful business.
Technical Notes
This information is based on Rowanmoor Pensions' understanding of current pensions law and taxation and is correct at the time of publishing.
Calculations are based on tax and national insurance data for the tax 2008/09 tax year.
Contributions are only allowed as a deductible expense if Her Majesty's Revenue and Customs (HMRC) is satisfied that they are paid "wholly and exclusively for the purposes of the employer's trade or profession".
This information relates to the Rowanmoor Pensions SSAS.