Paul Mahoney: Welcome to Proper Wealth with me Paul Mahoney. The show we discuss all things wealth creation, including property. Today we’re discussing the Directors’ Pension, the best kept wealth building secret. And joining me today is Kevin Whelan from WealthBuilders. Welcome, Kevin.
Kevin Whelan: Hi, Paul. Great to talk to you.
Paul Mahoney: So, Kevin, on Directors’ Pensions, I suppose, let’s start out by, what are they?
Kevin Whelan: Well, a Directors’ Pension is a basically a way to take the straight jacket off of normal conventional pensions where the only thing people can do when you associate the word pension, is invest in the stock market. Now, directors and entrepreneurs and certainly property people don’t really want to put all their eggs in that basket, they want to use that money to help their business, to help their property, and to make their pension a reflection of their business not of their past life. So, what a Directors’ Pension does it puts them in control, so it’s their name on the letterhead to be a trustee, and as they are a trustee, they get complete control of what they invest in, how they access that money and do the [inaudible] in a way that no other pension does.
Paul Mahoney: Okay. That’s quite interesting because obviously a pension is a very tax effective vehicle, but one of the biggest downsides is how restrictive they are. The investment options, the funds that are available there, the returns don’t tend to be very attractive. So, although they can be good for a lot of people, a lot of people see the downside and what they can actually invest in and what their options are once they want to actually take the money. It seems the Directors’ Pension gives a lot more flexibility around that.
Kevin Whelan: It gives complete flexibility. There’s almost no exclusions. So, once you have a license from HMRC to operate this very sophisticated high performance vehicle really, the restrictions are off. There are only two things you can’t do. Very easy to understand.
Number one, you can’t have personal assets. So, you can’t have yacht, cars, watches, that sort of thing because that’s a personal benefit. And number two, you can’t directly purchase residential property. You can do it indirectly. And well, I’m sure as a property expert, Paul, we’ll get to talk about that, but certainly they’re the only two things. Anything else is doable. So, whatever investment you want to make, whatever reflection of your own willingness to build your own wealth on your own terms, you can do it.
Paul Mahoney: So, the focus doesn’t need to be on being investments as opposed to personal use?
Kevin Whelan: Absolutely. Because in the mind of the HMRC, as I say, the ultimate arbiters of this, they’re granting tax relief, and that’s privileged. So, the purpose is to build wealth, and well, why wouldn’t anybody want to build wealth in a tax free way? Free of income tax, free of corporation tax, free of capital gains tax and free of inheritance tax. I mean, come on, how more tax efficient can you be?
Paul Mahoney: Okay. I mentioned in the title that it’s the best kept secret. Why is it a secret?
Kevin Whelan: Well, if you think about the way most pensions are invested, they’re pretty much arranged through an intermediate and service. So, you’ve got advisors on the one hand, you’ve got fund managers on the other hand, and both of those have a direct plugin to making money from the money the client has. So, we’ve all of a sudden then with the Directors’ Pension or as it’s technically known, unfortunately it’s not a very interesting title called SSAS or Small Self Administered Scheme. It’s basically a scheme for small business owners. The reason why that’s not being shared then is because, well, if you’re an IFA and you make money from funds under management and the client wants to invest money in their business or in property, then that sort of removes you from the income loop. And of course, the fund managers want to invest in funds. That’s how they make money.
So, if the two major groups who perpetuate pensions make money from your money and you want to make all the money yourself, then there is a potential conflict of interest. And the Directors’ Pension nails that conflict squarely and allows the individuals to make that choice themself.
Paul Mahoney: [crosstalk] why it is somewhat similar to property as an investment vehicle in that financial advisors tend to sort of try to steer their clients away from that because it removes their funds from the management and the advisory fees that go along with that.
Kevin Whelan: I think you’re probably hitting that nailed pretty much on the head, and you don’t really expect turkeys to vote for Christmas so it doesn’t happen very often.
Paul Mahoney: All right. That’s interesting. Certainly looking at it from that perspective of the financial advisor. If we look at why financial advisors came about, not so long ago there were essentially just salespeople for funds, and that progressed and now the market is a lot more reliable, I would say, but it does make sense as to why they would steer people away from looking at that Directors’ Pension that SSAS top arrangement.
Kevin Whelan: Yeah. I mean, if you think about the principle of wealth, wealth is built on a number of different assets. The stock market is a fine asset but it’s only one. Property is another asset, business is another asset, lending and joint venturing [inaudible] people is another asset, peer-to-peer is another asset, alternative investments, Boolean, all sorts of different things are genuine wealth building assets, but they’re not regulated and because they’re not regulated they’re not really promoted. So, what the Directors’ Pension or SSAS does is says, whatever you want to invest in, in the way that you want to do it, you can.
Paul Mahoney: I suppose because they’re not promoted, that means a lot of people don’t know that it’s an option too.
Kevin Whelan: That’s why it’s the best kept secret.
Paul Mahoney: Okay. All right. So, with regards to it being a secret, and with regards to our viewers not understanding how they might be able to use this for their own benefit, how do they actually go about finding out about this and maybe determining whether it might be right for them?
Kevin Whelan: That’s a great question because it’s not a very interesting subject to Google. Try googling SSAS, it’s a pretty dry subject, and if business owners are caught up in the tyranny of their own businesses, the length of time they’ve got to research these things is pretty limited. So, it’s really seeking out those people who have expertise in this area and just trying to make connections with people who’ve got some experience. Maybe their accounting might know a little more about that because they’re tax efficiency, and certainly there are many companies around who specialize in providing the education and the support and and the ideas that will help people feel like research.
Paul Mahoney: So, fairly common theme throughout the show and all the experts that we speak with is to seek specialist professional advice and determine whether this might be, because you’re saying, obviously you’re saying like it could be a great opportunity, especially for those that are a bit more business savvy and perhaps have a large pension that they’ve almost forgotten about because they don’t feel as though it’s their money.
Kevin Whelan: Well, quite right. I just recently posted an article which talked about £10 billion worth of money is lost and forgotten and kept by insurance because people lose contact when they move jobs or when the insurers are bought out and replaced. That’s a huge sum of money that’s just lost. That’s just on one level, a smaller parts, probably. But those we’ve got the biggest part, they’ve got the most to gain by gaining control because it does a number of things. One, it massively increases their potential return on investment, which therefore builds wealth.
Two, you’ve got complete control of costs because you don’t need a fund manager, you don’t need an advisor. So that massively reduces the cost base. And if you can have fun and enjoy what you’re doing with the money plus pass it on as a legacy in a way that no other pension can do, you’ve covered all the bases really.
Paul Mahoney: Exactly right. Yeah. And I suppose it’s a resource that a lot of people probably aren’t best utilizing. Probably you’ll obviously investing in property or whatever else to build investable asset base and contribute toward their end goal, and if their pension isn’t being utilized and it is that sort of thing they kind of forget about because they don’t feel they’ve much control over, that could be a massive resource that could really help them toward that end goal.
Kevin Whelan: Absolutely, and let’s think about the subject of pensions, as I said, it’s pretty great, pretty dreary and most people think about it as something that do not disturb till I’m 65. They lose, they get a level of disconnect. What the Directors’ Pension does is connects them to who they want to be on their own wealth building journey. That’s why it’s important to try and find out about it if you can.
Paul Mahoney: I actually hear all the time from property investors that the reason they’re investing in property is to supplement or replace their pension for that exact reason. That they don’t want to wait until 60 plus to retire, or they just want the flexibility to be able to do what they want to do with their money rather than handing it over to a fund manager and hoping that they break the mold and outperform the market.
Kevin Whelan: Right. So, instead of being a supplement, let’s keep the pension where it is and hope that you do something else to add to it, why not think about taking that money and just like almost if you imagine a piece of property, you take a property, you convert incredible value. If you take a pension and convert it to a Directors’ Pension you’ve created more value. So, you’re just doing what you would naturally do if you’re interested in the process of building wealth anyway.
Paul Mahoney: Okay. So, within these these Directors’ Pension structures, you mentioned that the investment options are quite vast. Are there any more most common investment options or strategies that go along with that?
Kevin Whelan: Sure. I mean, by far and away the most popular asset logically in the UK we have a love affair with property is property. Of course, there are many strategies you can use for property whether it’s commercial property, business owners owning their own property and renting from themselves so they become their own landlord, conversion of property from commercial to residential is very, very popular and a pension can facilitate that.
Paul Mahoney: So, actual development projects within the pension structure?
Kevin Whelan: Yeah. What’s really curious and interesting is we’ve seen pubs bought and developed, bonds bought and developed. We’ve seen doctor surgeries, dentist, surgeries, even conversions of churches if you can see the twist in the play there. Being converted on a church as opposed to in a church is quite a fascinating array of things that people can do and create loads and loads of value. There are some special rules to avoid the possibility of owning the residential property which is the danger point, but there’s training and education to make sure you don’t fall fowl of those. I think one of the more popular investment strategies people use is the one where they can lend money, they become a bank because first and foremost a SSAS pension, a Directors’ Pension is a trust fund with a bank account. You become your own bank.
So, if you decide you want to lend to somebody, provided you do enough due diligence on that person and you’re not connected to them, you can make a loan or make an investment and get the opportunity both to lend and to learn and to facilitate your own growth in your own property skills. That’s a very popular strategy.
Paul Mahoney: In lending, I assume you can lend to entities like companies?
Kevin Whelan: You can lend to companies, you can lend to individuals.
Paul Mahoney: Can you be the director and shareholder of that company?
Kevin Whelan: That’s a different strategy, it’s a great question. There’s two types of lending. Lending outwards, lending to people to whom you’re disconnected, and lending backwards to yourself to your company. In this case, though, the rule is slightly different. So, instead of being able to lend 100%, which you can to third parties, when you’re lending to yourself it’s 50%.
Paul Mahoney: Even as a limited company?
Kevin Whelan: Even as a limited company. In fact, in order to have a Directors’ Pension or SSAS, you need to be the owner of a limited company or LLP and prove to HMRC that you are genuinely a responsible person in the field of being in business.
Paul Mahoney: The reason I asked is obviously, it’s a fairly common strategy these days with people investing in Buy-to-Let property through the [inaudible] companies. It seems from what you said there, the Directors’ Pension does allow you to do that, but only up to a certain amount of your pension.Is that right?
Kevin Whelan: That’s correct. But if you can get access to 50%, when previously you could get access to nothing, and you still got the other 50% to use, there’s still a whole range of additional value you can gain, and let’s think about one other point which is rarely spoken about, with the Directors’ Pension you can also take on a mortgage. So, you can get leverage on your own money. So, whatever money you’ve got, you can take a mortgage to make that money worth more. Try doing that in the stock market. Walk into the bank and say, “Hi, I’ve just invested 200,000 in the stock market, will you lend me 100,000 to buy more stock?” The answer will be no.
Paul Mahoney: That’s obviously one of the major benefits of property investment, isn’t it? So, that’s really interesting. That’s all we have time for now, but we will have more after the break. Join us after the break for more on Directors’ Pensions.
Welcome back to Proper Wealth with me Paul Mahoney. We’re talking about Directors’ Pensions. The best kept wealth building secret and I’m with Kevin Whelan from WealthBuilders. So, Kevin, before the break we spoke about what Directors’ Pensions are, what they can be used for, so, fairly interesting strategies around how you can utilize those funds and potentially invest in property with borrowings, which I think would be something that’d be quite surprising to a lot of people that weren’t aware that was an option, and I suppose some of the reasons why it’s a secret and why people aren’t sort of vastly aware of these options.
So, we have spoken that property is an option, but what are the other investment options?
Kevin Whelan: Well, the other investment options as I mentioned at the beginning, is really whatever investment strategy you want to employ that you have expertise in, and that interest you and fascinates you in whichever way that would be. So, of course, you can invest in the stock market, but the benefit of investing through Directors’ Pension is essentially you become a wholesale purchaser. So, you can get access to funds without necessarily going through fund managers. So you can buy very low cost funds and trackers and ETFs and a whole range of thing so you keep your cost base low. If you want to invest in peer-to-peer, there has been a burgeoning of peer-to-peer since the credit crunch in 2008. All forms of peer-to-peer, whether it’s lending to people, lending to business, lending to property organizations, there is a whole array of opportunities within that.
Of course, there are alternative investments. Those investments which aren’t covered by FCA regulations but nonetheless would be interesting investments for people to look at. Again there are purveyors of those sorts of investments who will diligence those and promote those, and as long as each individual who as a trustee takes care to make sure they do the right due diligence, there’s no off limited investment at all. So, whatever you want to do, you can do.
Paul Mahoney: Okay. So, it’s very flexible?
Kevin Whelan: Very flexible.
Paul Mahoney: Yeah. All right. Okay. That’s very interesting. So, we’re talking about Directors’ Pensions and it seems [inaudible] very much needs to be approached from a business perspective with the right business mindset in doing so. Obviously, the flexibility is a positive thing, but you don’t want people running wild with sort of pension pot [inaudible] do. So, is there any sort of training or education available around how best to go about doing this?
Kevin Whelan: Sure. Well, first of all, just to point out that Directors’ Pension you have to apply to the HMRC in order to get effectively a license. That application carries with it the responsibilities, some due diligence. So, the revenue wants to know about you. They want to know about your business, they’ll check into the business, make sure it’s above radar, whether there’s payroll, VAT. The big concern the revenue have with all the tax privileges here is the potential for abuse.
So, once they’ve checked those things out, they want to know what your risk attitude is, what sort of investment you’re likely to make. In other words, they want to see a snapshot of what you’re likely to do before they grand you a license. Once the license is granted, given the array of things we’ve talked about, most people have never been a trustee of their own pension before. So yes, there’s training required, and the pension regulator who regulate these things, it’s not the FCA who regulate conventional pensions, they require trustees to be competent within six months of receiving their status.
There are two ways to get training, one is the pension regulator themselves has a toolkit called the trustee toolkit, I think, and it’s many hours of information about being a trustee. You’d have to look at that to see whether it was … really resonated with your learning style. But there are other companies too who provide more modular, more bespoke training, specifically around the suspension, specifically around the strategy that you want to use. The purpose for that is to keep you competent because you need to be compliant but to build confidence.
So, if you build those three things, and the training keeps you on track, and of course, there are various forms of additional pension trustee support you can get, including having someone who’s professionally trained almost to sit next to you. So, if you imagine it, it’s like a financial Ferrari, let’s say, you would want somebody sitting next to you on your first goes around the track. It’s a bit like that. So, you can have someone sitting next to you who is a professional trustee, who looks after those things. [crosstalk]
Paul Mahoney: You mentioned that’s HMRC due diligence on the individual? Does that mean that you need to be an existing business owner to do this?
Kevin Whelan: You do. So, the revenue want to check there is a genuine business in place. So, whether it’s a limited company or whether it’s an LLP, but there has to be some business that exists there. You can’t just apply-
Paul Mahoney: So, you can’t be … Well, correct me if I’m wrong, but can you … I’ve rephrased the question. Can you be an employee of 20 years with a decent sized pension and set up a Director’s Pension?
Kevin Whelan: You cannot. You need to have a legitimate business. Of course, if you think about property people since the change in government intervention on how penthouse property is taxed, we’ll see that many property people previously were self employed and owned their property in their own name or incorporating now. So, we’ve definitely seen a mushrooming of property business owners wanting to get access to that money.
Paul Mahoney: That was going to be our next question.
Kevin Whelan: Okay.
Paul Mahoney: If you are, let’s use the same example. You’re a 20 year employee but you have a limited company that has Buy-to-Let properties in it, would that be considered as your own business?
Kevin Whelan: Okay, difficult one. The answer is, it depends because the revenue you are looking for is something that genuinely trading, not really an investment company. So if there’s a potential for trading, so, if we talked about commercial property, or flipping property, or developing property, then that all fits in with what we would call the badges of trade. If it’s just holding Buy-to-Let property, it’s probably not going to work.
Paul Mahoney: Okay. All right. So, it does again seem like you’d need to seek guidance on whether this is going to work for you or not, but certainly seemed as though it’s a great opportunity for those that are business owners and potentially didn’t know that this was an option available to them.
Kevin Whelan: Yeah, the genuinely trading business owners who have pensions and want to connect that to build wealth independent of their company so they’re building wealth in addition, or property owners who can genuinely create a business or have got one, and many do, and they want to get access to their own pensions. I may make one of the points which is, the growth in this land and learn strategy means the more professional a developer or property expert becomes, the more attractive they become to being the inward receiver of money from other people who are new Directors’ Pension or SSAS trustees. So, there’s almost, I’m seeing a community of people kind of coming out of the pension woodwork to help and [crosstalk] support each other. Absolutely.
Paul Mahoney: Okay. That’s quite interesting. With regards to, I assume there are costs in doing this, and there must be some sort of level where this becomes a cost effective or [inaudible] option, correct me if I’m wrong, but is there a certain level of pension, for example of a pound figure where this starts to make sense?
Kevin Whelan: That’s a really great question, but as always with these things the answer is, it depends because if you’re in your 30s and you’ve got 30, 40 years to make a small pot into a very large one, then that could be a genuine reason for it. The other thing, of course, is a SSAS or Directors’ Pension can receive money from different places. So, we’re talking about a trading company. So, if we acknowledge the tax benefits and therefore companies making good profit can shelter that profit inside the pension but then use that money. So, it doesn’t really matter what the value of the pension that they’ve got, which is from their past, what matters is what they’re going to do in the future.
Paul Mahoney: More for the profits in the future.
Kevin Whelan: What I think we tend to see is, as I mentioned, the return on investment tends to increase, and not necessarily at the cost of a higher risk because there’s more control, there’s leverage and so on. So, it just beholds to the individual to sit down and calculate, what does it cost to do this? And there are some costs just like creating a business there are some costs. What is the value that they’re looking to gain? What is the sum of money they’re likely to have in that, and does it become a no brainer? In many cases it becomes an unquestionable a no brainer, but each individual-
Paul Mahoney: Given the tax effectiveness of the vehicle, even if they’re for example, a business owner wants to do a property development on the side, it seems like the Directors’ Pension could be a great option just for that purpose.
Kevin Whelan: We’ve definitely seen applications going through to revenue from relatively new companies with no pension history whatsoever, because they’re making good profits and they want to shelter those profits and see that this is a good tool both to invest, and of course, which is really important to build wealth independently of the business.
Paul Mahoney: I think a lot of people will find that very interesting. One thing we haven’t covered which I think is quite relevant to building an investable asset base or a pension pot is, what happens when we come to an end? What happens with the dreaded inheritance tax of 40%? How does that fit in with Directors Pensions?
Kevin Whelan: Okay. It’s a good question [inaudible] tax is clearly a big issue. As far as tax is concerned, I mentioned the SSAS itself is entirely free of all taxes. One of the benefits to note is the difference between a SSAS pension and other pensions. If you take out or have a conventional pension like a personal pension or even a SIPP. Some people get confused between SIPP and SSAS and they’re very, very different. The trust is created by somebody else. It’s an insurance company’s trust, it’s somebody else’s trust. So, when the individual dies then, they have to leave the trust fund so the trust is essentially closed.
Now, what that means is, the benefits will pass inheritance tax free to the next generation, but once they’ve got their hands on their money, then there’s potential inheritance tax for generations to follow. SSAS as a trust, and it’s a trust that you own so you can invite your family into the trust, your wife, your children, and because you’re creating their [inaudible], essentially a family trust fund, if you’re not around, the trust fund continues. So the trust fund doesn’t die with you. It continues.
So, essentially, you have here an intergenerational tax efficient tax planning tool that will effectively last forever. That’s a massive win if you’re concerned about inheritance tax.
Paul Mahoney: Yeah. Well, I think everyone is.
Kevin Whelan: [inaudible] most people have not picked up with this.
Paul Mahoney: Okay. Look, that was all very interesting on Directors’ Pension. We’ve covered quite a lot there. The flexibility that’s offered, the investment options including property, for example, with borrowing which I’m sure a lot of people weren’t aware was available to them. The fact that business owners can better utilize their pensions and have this flexibility, and the ability to pass on the legacy in a very tax efficient way. So very, very interesting stuff there. That’s all we’ve got time for now, and thank you for joining us on Proper Wealth, the show we cover all things wealth creation with a focus on property.