With the country slowly coming out of recession, directors and business people tend not to be thinking of pension provision – but there may be ways in which their pensions could assist their businesses.

The Small Self-administered Scheme (SSAS) has been a favourite pension and tax-planning tool for advisers with corporate clients, particularly small to medium sized firms.

The original remit of such schemes was to attract shareholding directors into making pension contributions rather than just investing in their own business by allowing a degree of self-investment and it has been very successful. Since their introduction in 1989 Self Invested Personal Pensions (SIPPs) have also become very popular.

Pension simplification in April 2006 was supposed to remove the distinction between SIPPs and SSASs however the reality is slightly different. True the previous differences in contributions and benefits are removed but some differences remain on investments and constitution. For the Inland Revenue (HMRC) there is still a distinction between company-sponsored schemes, which for ease we will continue to call SSAS and provider sponsored which we will call SIPPs.

Loanbacks from the fund to the sponsoring employer albeit now secured can be made by a SSAS. A SIPP has no sponsoring employer and therefore cannot make any loanbacks to any connected business without being hit with a minimum 55% tax charge.

So how could a pension loan work?

A company director needs finance for his business – he could try a bank or his pension fund. He can transfer his existing funds into a SSAS set up for him by a specialist trustee company. The scheme can then lend to his company up to 50% of the fund for up to five years, although this must be secured by a first charge on assets of either the company or its directors. A suitable interest rate of at least 1% over base rate is charged and at least annual repayments of capital and interest made.

The result – the business can get an important loan, the director a good return on the money in his pension fund – there is obviously a risk in concentrating pension assets into the company but many directors feel more confident of this type of investment than they do in insurance companies etc.

Although a SIPP cannot lend to a company connected to the scheme it is worth remembering both a SIPP and a SSAS can lend to third parties. So a pension fund can be used for business angel type investing.

For share purchase a company-sponsored scheme e.g. SSAS is limited to buying 5% of the shares in its sponsoring employer. For a SIPP as there is technically no sponsoring employer the fund could invest 100% in the directors own company shares.

There are however some very complex rules that block purchasing shares in your own business except in a few cases but again third party investments are fine for those willing to take a high risk but investing in unquoted businesses.

As long as it is done commercially there is no problem with pension plans buying assets from their members or their members companies. The allowed assets are usually commercial property and quoted shares or other investments.

For example a company that owns its commercial premises but is struggling for cash could sell all or part of the building to its director’s pension scheme(s).

Or a sole trader might sell some shares they own personally to their own SIPP thus releasing cash from their pension scheme.

Also remember that if you are over 50 (rising to age 55 in April 2010) it is usually possible for you to access your pension fund and take benefits and after April 2006 you can take the tax-free lump sum and not draw income. Although it is usually best to defer drawing benefits until you really need to taking all or part of the lump sum to clear some expensive debt, for example may be a worthwhile option.

Finally remember that pension plans need to be invested carefully – some of these ideas can help both the business and the pension but equally could cause a large loss. For those that do not want to get involved in these more esoteric areas (even some SIPP providers are not flexible enough to do some of them – one of the reasons why we have our own in-house SIPP and SSAS) you should still review your pension provision in these unstable times. Review your arrangements to get a reasonably charged plan and a good mix of investments.

Ian Smith is a Chartered Financial Planner and Certified Financial Planner at Central Financial Planning. He has won several awards including being the FT Pensions adviser of the year three times and has appeared on television and radio. You can follow Ian on Twitter @iancfp.

Apparently it is a word that puts people off planning for their future. The presenter of that radio show certainly thought so, and this is backed up by new research from AXA which suggests the word ‘pension’ puts people off. They have gone as far as teaming up with the Collins English Dictionary in an attempt to find a new name for ‘pension’.

Can a name really influence our decision to save or not to save to fund our expenditure in retirement? I suspect it is a bit more complex than that.

For some people, there is nothing daunting about pension plans. They understand that pensions are simply a tax-efficient investment wrapper. What really matters is where you choose to invest the money within your pension plan or, in the case of defined benefit (so-called ‘final salary’) pension plans, the benefits you are accumulating.

Sure, there is some necessary complexity involved with pension legislation. Most people do not need to have a detailed working knowledge of the various tax rules and regulations surrounding pensions in order to use them to build a fund for retirement. They can instead rely upon their financial adviser to point them in the right direction. It is typically higher earners, those with significant pension fund sizes and people with complex income structures who need to get involved in the really complex bits.

Apart from knowing that it is where you invest your pension fund that makes the real difference, it is important to have a reasonably good understanding of what your pension fund is likely to produce in retirement, in terms of both capital and income. In simple terms, this means the ability to take up to a quarter of your pension fund as a tax-free cash payment when you retire. The remainder of the fund is then used to generate taxable income for the rest of your life.

There were some major changes to the pension rules back in April 2006, with the intention of making them simpler to understand, and therefore more attractive. Consensus within the financial adviser community is that this ‘pension simplification’ mostly failed to achieve that aim. For advisers, the rules are now mainly easier to understand. However, as with all new legislation, the unintended consequence of change was the introduction of some even more complex factors.

Another reasonably big change is coming up soon, on 6th April 2010. From this date, the minimum age at which you will be able to take benefits from a pension is being pushed up from 50 to 55. Unlike other changes to pension ages in the past, this is not happening in gradual stages but in one go overnight. For people who are over 50 but under 55, this will mean a wait of up to five years before they can access the cash from their pension funds, until they reach their 55th birthdays.

We expect more changes to be introduced to pensions in the future. The current system is failing to encourage sufficiently large numbers of people to save for their own retirement. As part of their campaign, AXA was looking for suggestions to replace the word ‘pension’. My suggestion was Later Life Survival Fund, shortened to LatLifSurFu. It might appeal to younger people who are turned off by the word ‘pension’. The alternative – retiring without a LatLifSurFu – doesn’t really bear thinking about.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.

Use these top tips to start planning your own choices and options at retirement, to make sure you get the best results from your pension funds.

1 – Make sure that you start to look into your choices and options at least three months before you want them to be paid to you. This is to ensure that you have sufficient time to consider your choices and options and if need be to top-up your pension fund.

2 – Your pension plan provider should let you have a valuation of your plan some months ahead of the maturity date of the plan (but remember of course that this value can change between the date it is provided and your retirement date). They should also tell you what benefits they are able to provide and tell you also that you have the right to take the value of your plan to another provider if you wish to do so.

3 – If your pension plan has a guarantee in the form of Guaranteed Annuity Rates this is very important as it may mean that you will get a bigger pension payment from your current provider than you might get from the open market for annuities.

4 – If you are invested in ‘volatile’ investment funds (for example investment funds that are linked to the value of shares) you may want to switch to a cash fund in the run up to retirement. This will protect your pension fund from any fall in value in the short term but you will of course miss out on any increases in value attributable to the rising value of shares. In fact we would suggest that this needs to be reviewed in each of the five years before the maturity date of your plan.

5 – Consider if you need to take the tax free cash lump sum (confusingly now called a ‘pension commencement lump sum’) available from your plan. Many people do take the much loved cash sum but if you already have enough capital available for your retirement you may decide not to.

6 – Because you do not have to take pension income from your plan but you can still take tax free cash some people do this either because they have a capital project in mind (paying off a mortgage, buying new property, investing in a new business or paying school fees – these are some of the reasons for doing this that we have seen) or to take the tax free cash in stages to spend as income (and avoid having to pay any income tax!)

7 – Most people buy an annuity with their pension fund. You can choose the most suitable annuity depending upon your circumstances. If you have a pre-existing medical condition you may be entitled to an ‘enhanced’ annuity that will provide you with more pension income than a standard annuity. Also if you are a smoker you will typically be able to get higher annuity rates than a non-smoker. You should check to see if you are entitled to such an annuity.

8 – You do not have to buy an annuity to receive your pension income. You can instead keep the pension fund invested and take income from the fund, something known as income drawdown (or more properly unsecured pension). This is not without risk but might be considered if you expect to need flexible income in retirement or want to make sure that in the event of your early death your beneficiaries get the lion’s share of your pension fund.

9 – There are also arrangements that combine both annuity purchase and unsecured pension together to try to give you the best of both worlds. These are sometimes referred to as ‘third way’ annuities. You can also think about phasing in your benefits over a number of years.

10 – You can do all of this your self if you choose but alternatively you might employ the services of an adviser. If you do choose one who is wholly independent and has suitable qualifications and experience.

The BrilliantWithMoney SIPP is low-cost, entirely transparent, offers a complete range of collective investment funds and competitive interest rates on cash; but is entirely web-based.

There is no set-up charge and no charge for contributions or transfers. It offers access to more than 3,000 funds from over 230 fund managers, many with nil initial fund charges and discounted annual management charges.

Find out more and apply online at brilliantwithmoney.co.uk/sipp

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow Martin on Twitter @martinbamford and get BrilliantWithMoney updates @brilliantmoney.

Pensions remain an important retirement planning tool, offering valuable tax relief on contributions and a tax efficient environment in which your money can grow. But they can sometimes be difficult to understand.

Use these top tips to start planning your own retirement strategy and to make sure you understand how pensions work before you get started.

1 – Before you start planning for retirement, make sure that you have a good plan to repay any debt that you have. Saving for the long-term is obviously important but short term debt (credit cards, overdrafts, storecards, etc can get you into real financial difficulty if you do not keep up the payments due on them.

2 – Find out if your employer (if you have one) has a pension plan to which they will contribute. Very often you will also have to make a contribution to join an employer sponsored pension plan but it makes real sense to benefit from any payment available from your employer.

3 – Think about the alternatives to a formal pension plan. You may for example need to access the money that you are saving ahead of your anticipated retirement age. If that is likely to be the case then a savings and investment plan such as an Individual Savings Account (ISA) maybe more suitable for you.

4 – Make sure that you choose a pension plan with low management charges so that your contributions can work hard for you. Avoid any plans that have high set up costs or exit penalties if you decide to transfer your pension fund elsewhere or retire early.

5 – You will want to have a pension plan that offers a wide choice of investment funds so that you can invest your pension contributions in a suitable manner. Remember that most pension investment funds can go down as well as up in value but some will be more suitable than others for you (take a look at some of the SIPP portfolio ideas that we have created for BrilliantWithMoney SIPP customers)

6 – Some people have decided not to save for retirement by using a pension plan because they have lost confidence in such plans. They think their money would be better off in a cash account earning interest. Of course there is no reason at all why your pension plan should not be invested in cash earning interest; so that you get all the tax benefits but remain in cash.

7 – Your chosen pension plan should allow you to access valuations online any time that you want. Many old fashioned pension plans are paper based and to know what your plan is worth you have to phone or write to the plan provider. Choose a plan that safely allows you to do this online just like you might do with your bank account.

8 – If you decide to change your pension plan investment fund choice you should also be able to do this online. Your plan provider should also be able to give you a lot of understandable information about the investment funds that are available.

9 – Your pension plan should be with a financially strong organisation so that you can rest assured that your pension plan is safe and properly managed.

10 – There is no reason why you should not be able to establish and run your pension plan without taking advice but if you are not confident to do this for yourself then take advice from an independent and properly qualified and experienced adviser.

The BrilliantWithMoney SIPP is low-cost, entirely transparent, offers a complete range of collective investment funds and competitive interest rates on cash; but is entirely web-based.

There is no set-up charge and no charge for contributions or transfers.  It offers access to more than 3,000 funds from over 230 fund managers, many with nil initial fund charges and discounted annual management charges.

Find out more and apply online at brilliantwithmoney.co.uk/sipp

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

The BrilliantWithMoney SIPP is the result of collaboration between leading firms within retail financial services. Award-winning Informed Choice has worked closely with new third-party SIPP administrator Gaudi Ltd; believed to be the first SIPP provider able to operate totally online in the web 2.0 environment.

The BrilliantWithMoney SIPP is low-cost, entirely transparent, offers a complete range of collective investment funds and competitive interest rates on cash; but is entirely web-based.

There is no set-up charge and no charge for contributions or transfers. The annual SIPP charges ranges from 0.5% to 0.75% and this is described in detail here.

The online application process enables customers to open a SIPP, transfer existing pensions and set-up pension benefit options without resorting to a paper application. Users can manage their SIPP funds online through a single-sign on process with the investment platform.

This SIPP offers complete fund choice. You can choose from over 3,000 investment funds from over 230 fund managers. The BrilliantWithMoney SIPP also enables you to invest in company shares or keep your pension fund in cash earning a competitive rate of interest.

There are no initial fund charges on around 2,000 of the available funds. Most of the funds offer a heavily discounted annual management charge, usually chopped in half.

To find out more about the BrilliantWithMoney SIPP, simply visit www.brilliantwithmoney.co.uk/sipp/.

Higher earners saw their ability to get full income tax relief on pension contributions attacked in the 2009 Budget. New ‘anti-forestalling’ measures were introduced which restrict the level of higher rate income tax relief on offer for some investors. In simple terms, people earning over £150,000 in this or either of the previous two tax years face tax relief limits on pension contributions over £20,000 (or slightly higher in certain circumstances).

This year also sees the ISA contribution allowance increased from £7,200 to £10,200. The new limit comes into force from 6th October 2009 for investors who have reached their 50th birthday ahead of 6th April 2010. For the rest of us the ISA allowance goes up to £10,200 from the start of the 2010/11 tax year.

Pensions and ISAs have some different features, particularly when it comes to the tax treatment of contributions and eventual benefits. Deciding on what works best as a tool for your retirement planning depends on your personal circumstances, goals and objectives.

Here is a quick guide to some of the main features to consider. Let battle commence.

Tax relief on contributions

A key difference between pensions and ISAs is the tax relief each receive on the contributions. Whilst contributions to a UK registered pension scheme are usually eligible for income tax relief, investments into an ISA do not get these generous tax breaks.

Assuming you have sufficient earnings to justify the contribution (more on that later), your pension contributions should result in income tax relief at your highest rate of income tax, with a minimum of basic rate income tax relief added. This means that non-taxpayers and basic rate taxpayers get 20% tax relief added directly to their pension fund. Higher rate taxpayers are then able to reclaim the difference between basic and higher rate income tax (currently an additional 20%) as additional tax relief.

This income tax relief on pension contributions gives the pension route to retirement planning a big head start. It means that a pension investor can afford to take more risk with their money, as a 20% or 40% short-term fall in fund values would simply take them back to the starting point equivalent to an ISA investment. Of course these tax breaks on contributions come at a price.

Contribution limits

With pensions, you can contribute up to 100% of your earnings in a given tax year and receive income tax relief on the whole lot. This is subject to a couple of restrictions.

There is an annual allowance which limits the maximum pension contribution you can make in a tax year. This is £245,000 for the 2009/10 tax year, so unlikely to bother the vast majority of investors.

Since the 2009 Budget there has also been a special annual allowance which applies to pension contributions made by ‘high earners’; people with ‘relevant earnings’ of more than £150,000 in this or either of the previous two tax years. This is a basic allowance of £20,000 or an enhanced allowance of up to £30,000 where previous pension contribution levels can justify this higher amount.

Investors with no income can still contribute up to £3,600 each year into a pension and receive basic rate income tax relief. Remember that these figures are all ‘gross’ contributions after the addition of basic rate income tax relief.

The investment limit for ISA investors is currently £7,200. This is set to rise to £10,200 each tax year from 6th April 2010, or from 6th October 2009 for people who are 50 or older by the end of the 2009/10 tax year.

Of this ISA allowance, up to half (so £3,600 or £5,100) can go into the cash ISA component, with the balance available to invest in the stocks & shares ISA component. You can choose how much of the overall ISA allowance (up to half) to invest in cash.

Tax treatment of the fund

This is one area where pensions and ISAs are broadly neutral.

The money invested within a pension fund or an ISA fund is generally free of income tax and capital gains tax. The one exception to this is the dividend income from UK company shares. This dividend income comes with a 10% tax credit (which means it has already been taxed). You cannot reclaim this tax credit within the pension or ISA.

A difference in tax treatment of the funds does exist when it comes to inheritance tax (IHT). In the event of your death before taking retirement benefits, a pension fund is generally free from inheritance tax at 40% because it can remain outside of your estate for tax purposes.

The ISA tax wrapper ends automatically on death and the assets are included within your estate for IHT purposes. This means that if your total assets exceed the nil rate band (£325,000 for the 2009/10 tax year) then the balance is subject to tax. Married couples can effectively double this nil-rate band on the second death, if the first spouse to die does not utilise their own nil-rate band.

Range of funds

This is another area where pensions and ISAs are broadly similar, although much will depend on the particular product you select. Some pension plans, including many Stakeholder pensions, will offer only a limited range of investment funds from which to choose. Personal pensions now increasingly offer access to a wider range of funds from third-party external fund managers.

The widest range of pension investment options comes from using a Self Invested Personal Pension (SIPP). These enable to you access any investment permitted by HM Revenue & Customs rules, although some pension providers impose additional restrictions on investment choice.

With an ISA, the main choice in ‘product’ is between an ISA from an individual fund manager or an ISA from a fund supermarket. The former might only offer funds from that single fund manager whilst the fund supermarket will offer access to investment funds from a wide range of fund managers. Self Invested ISA products are also available, offering similar investment choice to a SIPP.

Access to the money

Actually getting your hands on your money again is an area where pensions differ quite a bit from ISAs.

Starting with ISAs, there are effectively no rules or restrictions to prevent you from accessing your money once invested. When you take money out of an ISA, you cannot replace it without using up whatever remains of your ISA allowance for that tax year. There might also be planning considerations when it comes to removing money from ISA funds if investment values have fallen.

Pensions come with a number of restrictions in terms of accessing benefits. Firstly, there is an age restriction. At present this is a minimum age of 50. From 6th April 2010 the minimum age at which you can access pension benefits goes up to age 55.

Secondly, there are rules about how much of your pension fund you can access as cash and how much of the fund has to be used to provide an income in retirement. Generally the rules enable to you take up to 25% of the pension fund value as a cash lump sum with the balance reserved for the generation of income.

Some older pension plans offer the possibility of taking more than 25% of the fund as cash, reducing the amount left over to provide an income. This is worth checking, particularly if you are thinking of moving your pension fund to a new provider when your entitlement to greater than 25% cash benefits could be lost on transfer.

Tax treatment of benefits

Capital withdrawals or income generated from an ISA are largely free of tax. With a pension, the cash entitlement is tax-free but the income generated by the remaining pension fund is subject to income tax.

Some people, when they start to take retirement benefits, use their tax-free cash (more accurately described as a pension commencement lump sum) as ‘income’; gradually phasing the taking of pension benefits to produce tax-free ‘income’ for the first few years of their retirement. This can be a particularly helpful strategy if there is no immediate need for a cash lump sum or if you are gradually phasing in your retirement and have other sources of taxable income.

Summary

Pensions and ISAs are two very different tax-wrappers used for retirement planning, but they do share some similarities. It is rarely a case of one being ‘better’ than the other.

Often people planning for their income requirements in retirement will use a combination of pensions and ISAs to create a total retirement fund that has the right balance of tax breaks (but access restrictions) and easy access.

Martin Bamford is a Chartered Financial Planner at Informed Choice and site editor of BrilliantWithMoney.

The two retirement planning claims that tend to cause most concern are “my property is my pension” and “I don’t need a retirement plan because I plan to just keep working”. In many cases both are just plain wrong, or at least misguided.

The scale of the problem

It is generally accepted that we have a problem with pensions in this country. We are all living for longer (on average) so the cost of funding a longer retirement is getting more expensive. The typical solution to this conundrum is to save more for retirement and retire later.

Indeed, the State pension age is already due to increase from 65 to 68, and more recent proposals suggest that age 70 might be a more realistic retirement age for State benefits within a few generations.

One way people seem to deal with this pension problem is to plan to fall back on the value of their home. New research from Barings found almost three million working Brits, about 8% of the population, are relying on their property to fund their retirement. This is not the number of people who think their humble abode will supplement their income in retirement, but the number who will rely on their property alone.

I fear that many of these people are in for a very rude awakening when they get older. In the past year alone we have seen £29 billion wiped off the value of the property owned by these ‘property pension’ owners. Residential property can deliver good long term results but it can equally be a very volatile investment over the short term.

The problems with property

Property as a retirement plan comes with two main types of problem – the investment problem and the practical problem.

From an investment perspective, property is a single asset class. This means that you are putting all of your hopes for a retirement income into the hands of one investment type, which can fall as well as rise in value. More specifically than that, you are often investing in a single property, which increases the investment risk further still.

If you go beyond simply considering your home as your retirement plan, and become a ‘landlord’ investing in a number of properties, you spread the risk a little more but also often introduce the risks associated with borrowing money to invest.

On a practical front, you need somewhere to live in your retirement. The money you can release when you downsize to a smaller property can be invested to generate the income you need, but after the cost of the property transactions you might find the income is nowhere near as much as you thought it would be.

It’s not all bad

The very best retirement plans we see typically include a good mix of pension and non-pension assets. Property can play a role in retirement planning, but it should not be the only ‘investment’ in your retirement portfolio.

If you are able to create a diversified retirement portfolio which includes a pension plan, an Individual Savings Account (ISA) portfolio, cash, property, business assets and other investments, you are more likely to have the retirement income you need when you eventually stop work.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.