Following pension simplification, many pension experts announced that the SSAS market was dead.
Why have a SSAS when you can have a simple Sipp? Every time another piece of pension legislation was announced, the cry “another nail in the coffin for SSAS” could be heard. How wrong this was.
Within the Finance Act 2004, as amended in every subsequent Finance Act since, there are effectively only two differences between a SSAS and a Sipp:1: A Sipp is established and administered by a person or body regulated by the Financial Services Authority, whereas a SSAS may be established by an employer and administered by whom ever that employer appoints.2: A SSAS may make secured loans back to the principal or connected employer of up to 50 per cent of the net assets for a maximum of five years. A Sipp with no principal or connected employer cannot make any loans to the member, his business or any other connected parties.
The difference in establishment and administration for Sipps and SSASs is, for most operators, negligible because most will run the schemes professionally and within a set of rules that should, in most respects, be entirely acceptable to the regulator.
However, within the SSAS, the employer may always dismiss any professional administrator or trustee. When it comes to acceptable investments, the SSAS provider must be as flexible as possible, as they cannot expect to remain the trustee and administrator if they run a restrictive list like many Sipp operators.
Within the SSAS, the assets of the scheme are held in a common trust for all the members.
This means that a common trust can hold a property for the benefit of members of the scheme.
Each member has an actuarial interest in the scheme, not in a specific asset. When members move on or die, assets, such as property, do not necessarily need to be sold.
Sipps, being individual arrangements, directly hold individual assets in a plan for each member.
When changes occur, there can be considerable upheaval and, in some instances, a property must be sold on the open market to satisfy the Sipp operator. Property held across several Sipps can be a very costly proposition.
There is also the additional problem for many Sipp providers where they are the sole trustee. This means they directly own the asset, whereas each individual SSAS has it’s own trustees, which may include a professional trustee.
Being sole trustee and owner of assets, particularly property, can lead to conflict with the member when the member’s wishes are not acceptable within the risk strategy of the Sipp operator. There is even the issue of the member making investment decisions and then suing the trustee for acting on instructions.
SSASs, being individual schemes, have additional flexibility at retirement over most Sipps – they can offer scheme pensions.
The majority of Sipps are established under a master trust, with each member having a separate policy within the scheme. Because all scheme pensioners must be treated equally, the scheme pension option is not available.
Scheme pensions are particularly relevant at age 75. The only other drawdown option is via alternatively secured pension where the drawdown rate is limited to 90 per cent of the Government Actuary’s Department’s rate for a 75-year-old and revalued annually on the same basis.
There can be no guaranteed pension. In the event of death the day after electing for Asp, where there is no dependant, 82 per cent of the entire fund is lost to tax.
The annual revaluation will mean that, in most instances, the maximum pension that may be drawn decreases annually.
A scheme pension will be set by an actuary based on 100 per cent of annuity rates and the member’s actual age.
Reviews do not need to be conducted annually, most advise triennially, and the entire pension can be guaranteed for a period of 10 years and can include, if funds permit, increases from inception, at RPI or 5 per cent.
In most instances, there will not be a large fund remaining on death that will be subject to the 82 per cent tax charge and there may be ways to mitigate some of that tax.
All these advantages, which were missed, or ignored by the SSAS is dead lobby, are outweighed by the next – the ability for the SSAS to make loans back to the principal or a connected company.
The rules state:
- Maximum loan of 50 per cent of net assets of the scheme at time of loan
- Maximum period of five years
- Interest rate of a minimum of 1 per cent over the average of six high-street bank base rates
- Capital and interest repayable equally over period of loan
- Secured with a first charge, on assets with a value at least equal to the loan and interest.
The issue of repayment of capital throughout the period of the loan can be overcome.
There is nothing in the Finance Act to stop a loan being taken out for one year, repaid with interest at the end of the year and another loan immediately taken out. The only downside is the cost of documen- ting the loan and ensuring security is in place each year.
For small and medium-sized business owners, the possibility of being able to borrow from their pension schemes is a significant benefit.
In this current market, we are hearing daily of companies being unable to raise capital. Regardless of what the Government seems to tell us, most businesspeople will tell you that borrowing money is extremely difficult. The banks are just not lending.
Even successful businesses with excellent track records and adequate security are finding it difficult, if not impossible. Many of those that are offered loans are being offered them at extortionate rates. Base plus 5 per cent is common and base plus 8 per cent not unheard of.
Indeed, just what is the point of the Bank of England dropping the base rate as they have, when banks are not passing that rate down? Look at personal unsecured loans and they are running at 8 per cent. Three year ago, when interest rates were 4.5 per cent, you could get a loan for 6.9 per cent.
Some say the banking system will never be the same again, probably a good thing. But what of business lending? The deduction is that businesses will continue to find borrowing more difficult than a year ago. For the wise, thank goodness for their SSAS.