Neil Ryder’s faith in The Financial System in the UK was shaken when he hit his own financial crisis in 2010. He’d spent most of his working life exchanging time for money and contributing to a pension that didn’t grow. By 2017, having discovered a whole new world of investment possibility, Neil’s monthly passive income far exceeds his wildest dreams! Here is his guest blog:
Pensions, generally, are not hot gossip.
If you’re anything like me the most dramatic conversation you’re ever likely to have about your pension is the one that begins “Oh s**t”, when you realise your fund has only grown in proportion to the payments you have made and no more.
But it looks like that is set to change.
The main point I wish to make is not to be distracted from the value of your pension pot by the illustration of how much income your pension would give you. Your provider might tell you that your current pot will yield an annual income amount of £x, but this isn’t telling you how much is in your pot altogether.
What you need to find out is what the transfer value of your pension pot is. That is, how much your provider has to cash out in order for you to shift your fund to another scheme.
Effectively this amount could represent a potent property investment pot that you could tap into if you found the right “pension wrapper” to enable it.
If the transfer value of your existing pension and that of your partner is around £160.000 or more it is worth thinking about moving it into a Small Self-Administered Scheme (SSAS) and using it ahead of retirement in order to grow your pot and your property portfolio simultaneously.
Now we’re talking. Instead of having a pension quietly accruing, but not really doing anything until you’re ready to retire and crystallise it, it could now become an active feature of your own investment portfolio.
Like other pension wrappers, the SSAS is a tax efficient vehicle for collecting money, but there are key differences in comparison with other available schemes.
1. Unlike regular pension products, you are a trustee of your fund. This means you are in control and have complete transparency over where and how the funds are invested.
2. The SSAS is regulated by HMRC as opposed to the Financial Conduct Authority, which means there is greater flexibility to invest in non-regulated, asset-backed opportunities with better returns than the High Street.
3. Provided you create a Special Purpose Vehicle, such as a Property Management Company, through which up to 65% of the fund value can be invested, then you can use it to build your own property portfolio, including residential property.
4. Unlike traditional schemes which default to your spouse only on your death and thereafter disappear, any money you have in the pension pot can be inherited by your dependents or anyone to whom you wish to bequeath it.
Looking at point 3 above is where we start to understand how to make funds available for investment ahead of retirement, even ahead of crystallising any part of our pot at age 55. By effectively using up to 65% of your fund to buy preference shares in a Special Purpose Vehicle which you set up you can legally use that money to invest in any type of property without incurring the 55% tax charge that other pension arrangements invoke for investments in the residential sector
The only “catch” is that at some point you have to ensure that the full value of the capital is returned to the company and that the SPV pays out an annual dividend of at least 7% back to the pot. This means that your investment must make a profit, and you must ensure that all the correct life insurance is in place to cover the investment should anything happen to you.
Given that property investors are growing increasingly accustomed to the practice of creating a company through which to conduct their business, this type of arrangement ought to be pretty straightforward. It provides an accessible and as yet untapped resource to grow both your business and your pension pot.
Indeed if you are already running more than one PAYE registered company you already have the structure in place to both sponsor your SSAS (company one) and invest a proportion of your pot through another legal entity (company two), operating as the Special Purpose Vehicle issuing preference shares.
For the majority of clients, however, it is the inheritability of the SSAS pot free of inheritance tax which finally convinces them to take action regarding their pension fund and do more with it. After all, for many of us the main reason for growing our investments, be they in property or other types of asset, is to provide for ourselves and our family in the future.
To flesh out how this works in practice, consider the following example:
Pension transfer value of £250,000 after transfer fees:
|10% must remain Liquid||£25,000|
|£95,000 required for fixed investments||£95,000|
|Potential Preference Share issue||£130,000|
These figures are for illustration purposes only. Don’t worry if your fund is less than this. We can partner people together to share costs and create worthwhile funds to use for property investment.
As you can see there is a way to work with pensions that is a whole deal more exciting than leaving them to grow quietly, or not: especially if you are a property investor.
If this sounds like the kind of thing you would be interested in pursuing with your pension pot, your first step is to contact your pension provider and ask them to tell you the transfer value of your fund, as well as provide you with release forms. Once you have the forms you can begin the process of transferring your money into a SSAS and get it working harder for you, helping you to grow your property portfolio and improving your investment return.
To find out more and discuss in greater detail what may be possible for your pension and property investments get in touch with Neil on 01793 858215, or email firstname.lastname@example.org.