The Clarke family run a small, but thriving, creative agency limited company business.
Initially established by Mr and Mrs Clarke, the board of directors now includes their two daughters, Kathy and Jayne, who work in the business day to day. Longer-term, the plan is that Kathy and Jayne will take over the running of the company, allowing Mr and Mrs Clarke to take a step-back and to enjoy their well-earned retirement.
Over the years, the Clarkes have taken financial planning advice from their financial adviser, who in turn has worked hand-in-hand with their accountant and they have accumulated a substantial fund within a small self-administered scheme (SSAS).
For the Clarkes, one of the attractions of a SSAS over individual self-invested personal pensions (SIPP) was the fact that the SSAS operates as a common trust fund, through which they have been able to pool their pension resources to make investments such as loans to their company and commercial property investment.
Their business trades from the high quality modern office building owned by the SSAS and the open market level of rent which is paid into the SSAS as a tax-deductible business expense, which in turn is received tax-free into the SSAS bank account for investment in line with the adviser’s recommendation.
Historically, the property has been notionally allocated to Mr and Mrs Clarke within the scheme, because, in the early years, they were the only two members and that’s where the funding lay; through employer contributions and pension transfers-in. However, Kathy and Jayne have been in the scheme long enough now to have accumulated significant funds in their own rights.
The liquidity problem
While the SSAS has served them very well to date, now that Mr and Mrs Clarke are looking towards retirement, they are a little concerned about there being liquid funds available to meet their pension commencement lump sum payments (PCLS) in the next few years.
They have a review meeting with their adviser, Anna, who reassures them that she has already been planning for this eventuality. Anna reminds them of a discussion they had when the SSAS was first created wherein she outlined one of the key advantages of a SSAS being its common trust fund structure. Anna further explains that this can mean that any member can look to any scheme asset to provide them with retirement and/or death benefits.
Anna states in simple terms that, although a commercial property may be notionally allocated to member A currently, it can be exchanged in full or in part for more liquid assets of the same value for member B.
The office building is professionally valued by a Royal Institution of Chartered Surveyors (RICS) registered valuer to determine its current open market capital value.
The value is confirmed as £350,000. Currently, that is notionally split 50/50 between Mr and Mrs Clarke. Other assets of the SSAS include a platform investment account managed by Anna. She confirms its current value to be £250,000, of which £100,000 is notionally allocated to Kathy and Jayne.
Anna explains that, because Kathy and Jayne do not have benefit entitlement within the scheme amounting to £350,000, the property cannot be notionally reallocated to them from Mr and Mrs Clarke in its entirety. She further explains that, should the property be reallocated to them in its entirety at this time, that would result in moving pension fund value from some members to others and that this cannot be done without tax charges arising on the members involved.
Anna states that the planning she has in place will enable a gradual reallocation of the property to Kathy and Jayne over the next few years, starting with £100,000 now. This in turn means that £100,000 of the bricks and mortar are now notionally reallocated to them in exchange for £100,000 of liquid platform investments. Kathy and Jayne now start to benefit from a share of the rental income generated by the property.
Anna confirms that a similar exercise can take place as and when additional funding is available in the SSAS for Kathy and Jayne, but in the meantime, Mr and Mrs Clarke have sufficient liquidity in the scheme to meet their short-term PCLS needs.
Stephen McPhillips is technical sales director at Dentons Pension Management