The pressures on SME owners from Covid-19 may have distracted them from allocating time to understanding their pension schemes. Aside from the obvious impact on returns, many may not be aware of ways they can take more control over their retirement and use pension scheme assets to support their business. Planning for retirement matters now more than ever given the current market volatility and low-yielding environment.
For many, pensions can be a source of confusion if not a headache, so guidance and understanding is needed to ensure people are effectively planning for the future. Being pension aware is not just a case of recognising the need to save for a comfortable retirement, it is also fundamental that people understand how much they need to save to ensure that they have sufficient retirement income.
Indeed, although annual payments are set to increase by around 2.5%, the new State pension would see retirees receiving £175.20 a week, up from the current £134.25 a week. Yet this is unlikely to cover everyday living expenses for most people and should not be relied upon as a sole means of income. Therefore, it is important that people, particularly millennials, understand the true cost of retirement and make adequate provision.
Building a pension pot is an ongoing process and requires contribution levels and investment decisions to be kept under review. On approaching retirement, early conversations should be had with financial planners to explore the best opportunities to secure retirement income, including considering income drawdown versus annuity purchase, Lifetime Allowance implications for those with larger pots, and the option to take up to 25% of a personal pension as a tax-free lump sum.
Covid affecting contributions and long-term pension value
It’s no surprise that the pressures of the pandemic have had an impact on contribution rates. Recent research has shown that one in ten UK workers have paused their pension contributions, potentially having serious implications for retirement hopes across the country. Some 37% of this cohort did so to use the money for essential spending, while 30% had paused because of redundancy or furlough. The new Job Support Scheme, announced in late September, will also not be covering pension contributions. Yet while a pension holiday may make sense for some in the short term, savers should understand that contributions will need to be higher than they were before when they start paying in again, in some cases by as much as a fifth for those closer to retirement.
Across Europe, there are also fears that large increases in unemployment will lower tax revenues used to fund state pensions and reduce contributions. Meanwhile, interest rate cuts and new government-backed bond-buying programmes have reduced the income pension funds earn from their fixed-income investments ‘ the long-term value of pension savings could be under threat. It is crucial, therefore, for those with long-term pensions to revaluate their pension arrangements to negotiate the best outcome for their requirements.
SIPPs and SSASs give you more control
One method to take more control of your pension saving is through using a self-invested personal pension scheme (SIPP). SIPPs are a type of money purchase personal pension scheme that have much wider investment options than many personal pensions, allowing for much greater flexibility since investments can include assets such as unlisted shares and commercial property. A SIPP also carries benefits in that it can borrow up to 50% of the scheme’s net assets for investment purposes, such as the purchase of a commercial property.
Another commonly overlooked opportunity for company owners and directors is small self-administered schemes (SSASs) ‘ company schemes that are effectively designed for business owners and senior management. Unlike a SIPP, a SSAS allows members to make a loan from the SSAS back to the company. While these funds can’t be used to rescue your business, if more funds are needed for working capital or to keep growing your business, then you can borrow up to half the value of the SSAS. The company is then required to pay interest to the SSAS, which means that the business owners benefit from interest payments that would otherwise be paid to a bank. Amid the pressures of the pandemic, this could be an important and cost-effective source of capital.
Business owners who already have SIPPs or personal pensions can transfer these into a SSAS. SASSs function very similarly to a SIPP, although new schemes require HMRC approval. Contributions to SSAS schemes are tax deductible and the directors also have greater control over investments including property purchases.
Ultimately, although there has been a great impact on returns and contributions, SME owners should not overlook all the options available to them in providing liquidity to their businesses in this difficult time. SIPP and SSAS pension schemes offer an alternative and cost-efficient means of funding business growth, an attractive tool during a turbulent economic period.