It was the mysterious Mr Phelps who in 1889 was credited with the quote: “A man who never makes a mistake will never make anything.” This could well be a mantra for the entrepreneurial owners of small and medium-sized firms who will sometimes take business risks in the pursuit of growth.
That is not to say they are perennial risk-takers, as once some wealth has built up in the company it is often retained to cover any unforeseen business consequences that might require them to access funds at relatively short notice.
Accountants, tax planners and advisers have long had to battle SME owners with the argument for sheltering away these large earned profits into pension schemes, which until this year was countered by the inaccessibility of the funds. Funds were wholly unavailable until age 55, at which point only one-quarter could be accessed tax-free and the balance dribbled out over the remaining lifetime of the individual.
However, the introduction of the pension freedoms in April tipped the balance in favour of advisers, who can now argue access to the whole of the pension pot is available for those aged 55 and over.
While the penalty for accessing in excess of the lump sum would be an income tax charge on the drawings, this seems to have been sufficient for numerous SMEs to have a change of heart, with many new clients contributing from company reserves into pensions for the first time.
Those who were early in the new regime and contributed fully before 8 July could have benefited from the Chancellor’s enhanced annual allowance and, with carry forward, contributions of up to £220,000 for each individual. Where businesses are often husband and wife-owned, this meant a substantial sum could be sheltered away, subject, of course, to the “wholly and exclusively for the purposes of the business” rule. For those who missed the 8 July summer Budget deadline, up to £180,000 can still be contributed subject to some current pension giving access to carry forward rules.
Where businesses are contributing large sums for the first time, a SSAS is often the chosen vehicle – and quite rightly so. The SSAS was introduced back in the 1970s primarily for this type of individual who, being a decision-maker and controller of their company, would naturally want to have similar input to their pension savings.
The SSAS continues to offer this flexibility of control far more so than the more fashionable Sipp, because each SSAS is an individual freestanding legal entity and, in the vast majority of cases, all members will be trustees. The power to appoint and remove professional advisers to a SSAS will usually rest with the member trustees, again giving control. This is opposed to Sipps where, even if the member is co-trustee, the plan is run very much upon the rules and conditions of the Sipp operator and, if a falling out occurs, a move of the assets within the Sipp to a new legal entity and operator is required.
SSASs have two additional aces up their sleeve. The first is the facility to loan funds back to a founder employer, for periods not exceeding five years, at a commercial rate of interest and where suitable security can be offered. Connected loans from Sipps are explicitly prevented by penal tax charges.
The second feature is particularly useful where the SSAS is funded by a family-run business that has or may have multiple generations. A SSAS can have multiple members whose benefits are served from a common trust fund. The advantage of this is, where the SSAS holds an asset that is integral to the business, the proportional apportionment of that property can be moved down generations as new contributions come into the fund for them, providing liquidity to pay the benefits of the older generation. This is a far more complex operation where separate Sipp trusts are held for each member.
But time is running out. With the already announced tapered annual allowance reducing maximum contributions for high earners from April and other tax relief changes threatened in the spring Budget, those who have not taken advantage of this window of opportunity should consider doing so now.
Martin Tilley is director of technical services at Dentons Pension Management