This year marks the 30th anniversary of Sipps, but a small self-administered scheme could provide a useful alternative in some circumstances
Self-invested personal pensions have rather overshadowed small self-administered schemes, and SSASs are often overlooked when it comes to pension planning.
There are, of course, differences between a Sipp and SSAS, not least of which is that a SSAS is an occupational pension scheme established by an employer for the benefit of certain selected employees. A SSAS provides considerable flexibility and control over the investment policy and underlying assets and its members are usually the trustees too.
SSASs will normally qualify for various important legislative exemptions provided they have no more than 11 members, all members are trustees, and all trustee decisions require the unanimous agreement of all member trustees.
A SSAS is established under trust and it must be for an active business. It is unlikely that a dormant company would be permitted to register a new SSAS with HM Revenue & Customs.
Given the potential complexity of running a SSAS, it must have a scheme administrator who must be a “fit and proper person”, whose role is to deal with HMRC and ensure all the correct reporting and documentation is submitted.
This is key as fines can be imposed for failing to do so and HMRC reserves the right to de-register schemes. This could lead to punitive tax charges.
A SSAS is a really useful tool and the sector continues to grow, with many advisers recommending a SSAS for the first time. For small businesses, they can be a valuable way to aid growth, as the SSAS trustees can purchase commercial premises and provide a loan to a sponsoring/participating employer.
The assets are held for all members as part of a common trust fund – another difference to a Sipp – and can provide considerable flexibility. The value of a member’s interest in the SSAS depends, of course, on the contributions and transfers paid in for each of them and the investment growth achieved.
This value will be calculated as a percentage of the fund and usually any member can look to any asset to provide benefits. For instance, if you have a family firm where the business premises are held within a SSAS and the father wishes to retire, more liquid assets can be used to fund the retirement rather than a forced sale of the commercial property.
I mentioned that a SSAS can make loans to a sponsoring/participating employer. It can be used for most purposes including cashflow and funding company acquisitions.
There are a few hurdles that need to be cleared before this can be done. First, loans in total cannot be more than 50 per cent of the net asset value of the SSAS. The maximum term of the loan is five years, with repayments being made in equal amounts of capital and interest.
In terms of the interest rate, it must be commercial.
The loan interest, allowable as a business expense, is paid into the SSAS. The loan must be secured by way of a first legal charge over a suitable asset or assets with a market value at least equal to the amount of the loan plus all interest due over the term.
Loans to unconnected third-party firms, where a sound investment proposal exists, may not need to be secured. The SSAS cannot provide a loan to a member, or a person connected with a member because it would be an unauthorised payment and give rise to tax penalties.
Purchasing a commercial property using a SSAS is one of the most well-known benefits of using this type of pension scheme. This can include the employer’s business premises, which can be leased back at an open market rent.
If the SSAS purchases the property from the employer, this can inject valuable cash into the business and the property should then be protected from the employer’s creditors in the event of insolvency. No inheritance tax is payable and the growth in the value of the property, when it is sold, is not subject to capital gains tax/corporation tax.
The commercial rent provides a regular income stream and is received tax-free into the SSAS bank account. If the property is purchased from a connected party, then it must be independently valued and transacted at “arm’s length”.
It is the same if it is going to be leased to a connected party – the lease terms must reflect commercial terms available in the market and be supported by a valuation.
So, 30 years on from the start of the Sipp concept, let us not forget its older sibling and the benefits a SSAS can offer advisers and clients.
David Fox is a director at Dentons Pension Management