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Structural strength

SSAS and Sipp have structural advantages and disadvantages and advisers can face a dilemma when deciding between the two products

Ian Ward:  Consultant Barnett Waddingham
Ian Ward: Consultant Barnett Waddingham

Advisers are confronted with a dilemma when deciding between SSAS and Sipp. The advice will often be driven by obvious factors such as price, administration or the perception that one is simpler to operate. However, there are structural differences which might influence the decision over the type of arrangement to use.

Both SSAS and Sipp can be established as trusts but a Sipp can be established under other legal instruments such as a contract or deed poll. Some insurance company Sipps are based on a contract arrangement rather than a trust. This gives members access to the Financial Services Compensation Scheme on default of the Sipp provider, which allows compensation of up to 90 per cent of the total loss without limit. While the compensation is limited to £50,000 for a trust-based Sipp, the assets held by the Sipp should be protected as they are held separately by the Sipp trustees and not the Sipp provider.

However, the use of a contract structure means that the Sipp member is not in control of the investments. Only the provider will have the authority to sign documents. Control and flexibility is important to members and cannot be overstated. Many potential Sipp members might be put off if they do not hold registered ownership
of their pension assets.

Typically, a Sipp is a “product” set up under a single master trust, with many members, each of whom has a sub-trust to hold their pension assets. The master trust is set up by a provider and the Sipp is managed by the provider. Each Sipp member is one of many and, while he chooses his own assets, he cannot control the rules of the scheme.

A SSAS is constituted as a separate trust fund for its members, of whom there are few. Typically, the SSAS is established by an employer
for senior staff, who tend also to be the trustees. The trustees manage not only the investments and the terms of the trust deed themselves.

Hence the members of a SSAS have more control over the pension than Sipp members. As an individual trust, SSAS rules can be tailored to needs in terms of the control and admin of the scheme. In contrast, because a Sipp provider has so many different members but they are all in one scheme, all members will be subject to the same rules. This can lead to some restrictions on investment choices.

Perhaps the most striking example of where a SSAS and Sipp structure differs is in the provision of scheme pension. This is typically used by members later in retirement as it allows the provision of a non-annuity-based pension which does not suffer the same artificially low maximum income as alternatively secured pensions.

One rule of scheme pensions is that if one member’s scheme pension is reduced, then all other members of the same scheme who are drawing scheme pension must reduce theirs in proportion.

The effect of this in a Sipp would be that poor investment returns in one member’s Sipp could have an adverse effect on the pension of an unconnected member in the same Sipp. A SSAS, having few members and pooled investments, does not carry this risk. Sipp providers have been inventive in coming to terms with this structural weakness. Some use a “family Sipp” approach, where a separate trust is used for a small group of Sipp members which, among other things, allows easier access to a scheme pension.

The structure of a SSAS (or family Sipp) as a single trust with a small number of connected members can be helpful in property purchases. Sometimes, a property is to be purchased which would be beyond the means of one Sipp member, so a joint venture using the pension funds of several members is appropriate.

A Sipp is capable of arranging this, with the ownership split between two or more members of a Sipp. However, there is significantly more paperwork in a purchase made between several Sipps than there is in a purchase made by a SSAS.

Each style of “do-ityourself” pension scheme has its advantages. For the three of four years leading up to 2008 and the recession, Sipps received great favourable publicity, perhaps unfairly at the expense the SSAS approach

The trustees of a SSAS may find it easier to achieve borrowing, being a single entity, than a group of Sipps. Further, each Sipp member must be able to trigger a sale of the whole property if liquidity is needed. SSAS trustees could more easily raise liquidity from other assets without
the need to sell property.

Having a single scheme with pooled assets, as in the SSAS, rather than various individual pots within a Sipp does allow a more flexible aspect on investment management.

Where, in a SSAS, the investments are pooled between members, the trustees can choose the most appropriate asset to sell when liquidity is needed. A Sipp member is, of course, limited to being able to dispose of the assets in his own share of the Sipp.

The structure of a Sipp as a personal pension arrangement rather than an occupational arrangement confers one major advantage.

Since October 2008, Sipps may accept protected rights funds relatively easily, subject to the provider being willing. It is not forbidden for a SSAS to accept protected rights but the contracting-out requirements of occupational schemes make the paperwork onerous and the costs prohibitive.

For the three of four years leading up to 2008 and the recession, the Sipp route received great favourable publicity, perhaps unfairly at the expense of the SSAS approach.

Recent investment conditions have perhaps thrown some of the points above into relief, showing that the SSAS structure might often make it the more appropriate advice for the client.

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