How To Fund Your Pension With A Huge Contribution

How To Fund Your Pension With A Huge Contribution
Underwater by Andy Deitsch. Why?

Forget Annual Allowance - it's possible for a self-invested pension to make a contribution of up to half a million pounds and enjoy tax relief on this sum.

A Large Pension Contribution Paid By Your Company From Its Trading Profits Into Your SSAS Could Substantially Reduce The Amount Of Corporation Tax It Could Pay

How To Fund Your Pension With £500,000

That's providing the contribution meets the "wholly and exclusively for the purpose of trade" test, details of which are set out towards the bottom of this article.

On the face of it, the company's contribution is limited by your annual allowance, currently £40,000 (2016/17).  However, a company can make a much larger contribution.

SSAS is an occupational pension scheme.  The rules for these pensions are designed specifically for small-to-medium enterprises.  Within the legislative framework, there's a facility for the company to make indirect contributions.

An indirect contribution is not specifically allocated to a member in the year the contribution is made.  It'll either be allocated to members in future years or it'll used to fund the pension scheme’s administration expenses.

When an indirect contribution is allocated to your personal fund, that's when your annual allowance is applied.

There's no limit to the number of times a company can make indirect contributions.  However, the number of current and possible future members will create a natural ceiling. The age of members must also be taken into account, as it's only possible to distribute funds to members at the annual allowance level, and until the receiving member’s 75th year.

Corporation Tax relief on the contribution is available in the year of the contribution.  If the contribution exceeds £500,000 (up to a maximum of £2 million), the relief must be spread over future years, as confirmed by the Finance Act 2004.  Further information is contained in the Pensions Tax Manual.

Contributions can either be paid in cash or in-specie, for example, contributing a commercial property, or transferring in other assets such as a portfolio of peer-to-peer loans.  Cash must be invested in any approved asset class, such as stockmarket assets, commercial property or even be loaned back to the sponsoring employer.

The reasons why this works are as follows:

  • The contribution is subject to pension legislation
  • You cannot benefit from the funds until they're allocated to you
  • The allocation of funds to you and other members is limited by your annual allowance
  • The withdrawal of your funds from the pension is covered by drawdown legislation
  • It's not possible to distribute the funds back to the sponsoring employer without breaching current pension legislation and incurring substantial tax charges

There are several situations where this might be of value to you:

  • If you're planning your exit strategy and want to provide for future pension contributions
  • If your company has a surplus of cash and wants to provide contributions for the future
  • If your company is looking to reduce its Corporation Tax liability
  • If you want to build your pension fund to purchase commercial property
  • If you want to provide contributions for new and future members

Tax Relief On Employer Pension Contributions

For tax relief to be given on employer contributions, they need to be deducted as an expense in calculating the profits of a trade, profession or investment business. They should be included in the profit and loss account of the employer and will subsequently result in the amount of an employer's profit being reduced. In the case of a trade or profession the employer contributions will be deductible as an expense provided that they are incurred wholly and exclusively for the purposes of the employer's trade or profession.

HMRC's view is that contributions to a registered pension scheme will normally be allowed and that it would be 'relatively rare' for a pension contribution not to be for the purpose of the employer's trade. It will only be disallowable if there is an identifiable non-business purpose for the employer's decision to make the pension contribution or for the size of the contribution. If the local inspector thinks that a contribution may not have been made wholly and exclusively for the purposes of the trade, he must report to a central Technical Team to ensure such cases are treated consistently.

If you're intending to make a large pension contribution, it's recommended that you or your company's accountant discuss it first with HMRC.

Discover More About SSAS

Click each of the blue buttons below to find out more about SSAS and how it compares to SIPP.

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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