6 Points of today’s SSAS
Many experts mistakenly announced the doom of the SSAS (Small Self-Administered Scheme) at pension simplification. With every piece of pension legislation announced, the cry went up. As so often when one follows the heard blindly, all were summarily proved wrong. The “why have a SSAS when you can have a SIPP,” has long since disappeared.
To date, with every every amended Finance Act, six significant differences stand out all the more.
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A SIPP is established and regulated by a person or body regulated by the FSA, whereas a SSAS is established by an employer and administered by the Pension Regulator.
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A SSAS may make secured loans back to the principal or connected employer of up to 50% of the funds net assets, for a maximum of five years. A SIPP with no principal or connected employer, cannot make loans to the members, his business or any other connected parties.
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Within the SSAS, the employer may dismiss any administrator. When it comes to acceptable investments, the SSAS provider must be as flexible as possible. If they run a restrictive list as many SIPP operators do, they cannot expect to remain as administrator or trustee for long.
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Within a SSAS, all assets are held in a common trust for all members. This means, the common trust can hold property for the benefit of members of the scheme. Every member has an ‘actuarial interest’ in the scheme, not in specific assets. Another advantage is that when members move on or die, assets such as property need not be sold. SIPPs are individual arrangements therefore hold individual assets in a plan for each member. When a change occurs, there is considerable upheaval. In some instances that means selling the property on the open market to satisfy the SIPP operator. This often turns out to be very costly and complex.
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Many SIPP providers are the sole trustee, which means they own the asset as opposed to each individual SSAS having it’s own trustee. This may include a professional trustee. The great issue with being a sole trustee, is, this can lead to conflict with members. This occurs when members’ wishes are in opposition to the risk management strategy of the operator.
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SSAS can offer scheme pensions at retirement. SIPPs are established under a master trust, with each member having a different policy within the scheme. This means the scheme pension option is not available to most SIPP members.
Borrowing from your SSAS Pension fund to aid your company
In the third of my conversations with Pension Practitioner .com, who are the U. K’s leading SSAS provider. I put to them that in the current economic climate many companies may not have surplus fund to put away into pension funds for the future whilst the present is so uncertain.
This notion is out-dated. The managers of Pension Practitioner .com demonstrated that unlike a SIPP (Self-Invested Personal Pension), a SSAS (Small Self-Administered Scheme) may lend a portion of its capital to the sponsoring company.
This is useful for a number of reasons, not least if the company is considering buying plant, machinery or investing in research and development, activities which already attract tax advantages themselves.
The maximum overall loan to the principal and participating employees is 50% of the assets of the scheme, valued at the date of the loan. This is subject to certain stipulations;
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- The loan is secured by first charge on an asset of adequate value.
- Maximum term of 5 years.
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Minimum interest rate of 1% above the base lending rate of the six leading high-street banks.
- The repayment of the loan capital plus interest in equal installments over the loan period. One annual payment may be rolled over for a year.
Pension Practitioner .com clarified that third party loans may be made, but not to member trustees or persons connected to them. Schemes violating this rule, making payments to members or passing assets to members or connected parties outside of the rules will face tax penalties and charges. Advice should be sought before loans, transfers or investments are made.
In practice most decent SSAS administrators will insist on a practitioner being used and many provide one as part of the standard administration fees.
SSAS needs to be carefully considered along side SIPP to determine which is best. The certain fact is SIPP is not the only answer for secure shelter for family companies.
The Future For SSAS
The Small Self-Administered Scheme (SSAS) market is old and credible but largely unknown. Too long has this jem been hidden in the shadow of the Self-Invested Personal Pension (SIPP). Many do not truly realise what a SSAS offers.
For going on 35 years SSAS has languished behind SIPP in general popularity, used by only the elect few. One commentator called SSAS the private bank of pensions.
Rule changes by HMRC has unlocked the SSAS for the general market and informed persons ought to know.
Pension Practitioner .com the leading provider elaborated on the new potential for the unlocked SSAS. Pension analysts at the firm confirmed that between persons with family connections, SSAS remains to be better in all regards to SIPP. But now any key employee, property developer, shareholding director of a private company or partnership needs to pay attention.
I asked Pension Practitioner .com to summarize in a word what they basically mean. ‘Control’ was the response. At less cost than a SIPP, many business managers opt for the premium of control SSAS offers.
Pension Practitioner .com SSAS services commentary.
I asked Pension Practitioner .com, what happens if a SSAS provider’s service practitioner fails to deliver? Simply appoint another they said. They, for example, do not impose take-over fees.
What I wanted to get to was the real and practical investment reasons which differentiate SSAS from SIPP. The managers of Pension Practitioner .com responded by first clarifying that assets are held by the members as trustees.
The other main advantage is that SSAS operate on a ‘non-allocated’ and pooled investment approach. This means that not only are assets jointly owned, but this allows for a fluid transfer of assets between generations as retired member’s fund decline and newer members fund builds up. This is especially beneficial for situations where members are related or work for the same company.
The last important difference said Pension Practitioner .com, after cost is that of control. The real choice one is making is ‘ do I want to own the pension scheme, (SSAS) or should I piggyback on someone else’s, (SIPP). The former is more pro-active and involves more paperwork. But with a designated pension practitioner this issue falls away.
In summary, rather than debate the merits of SSAS over SIPPs. The definitive proof is obvious. Gone now are the reasons for SIPP, like, different funding, investing, borrowing and benefit rules. The managers of Pension Practitioner .com made abundantly clear that SSAS are of credit to their owners, but as a pension fund they do need planning and attention. This brings in the need for a practitioner to consult, to accept the obligation and duties of administration. To maintain accounting records and prepare annual accounts. To complete and submit HMRC scheme returns, event reports and quarterly accounts for tax returns.
Pension Practitioner .com finished by saying that, “SSAS are not a mass-market product. But for those clients who take up this valuable instrument, most always question why they never opened a SSAS earlier.”
The best SSAS for your business
SSAS pensions are the best and newest solution for informed persons. Business owners and directors all over the UK are using them with advice from their financial advisors. Smart bespoken schemes to leverage their enterprises through the credit crunch into the ‘black’.
As with all new things, there are now a deluge of providers offering services, most of which are good. Never-the- less, pension experts at Pension Practitioner .Com stand by their business model of only bespoken SSAS administration service.
After recently topping a survey of SSAS administration providers and being hotly tipped to win industry awards, I asked them to differentiate between the different classes of SSAS.
Insured SSAS - Are offered by insurance companies, one is able to self invest the assets of the scheme, but there is a requirement for a minimum amount of money to be invested in the insurance company’s range of funds.
Hybrid SSAS - This is also provided by insurance companies, once the scheme assets are divided into insured investments and self investment, it is deemed that this is a hybrid arrangement.
Deferred SSAS - is when the insurance company will operate the fund on an insured basis with the intention of switching to a hybrid or insured SSAS in the future.
Full SSAS - This is the product administered by Pension Practitioner .Com. Under this method, there is no insurance company or third party trustee involved. The members are the trustees and make the investment decisions for themselves, they are obliged to consider investment advice with their assets.
Contracted Out SSAS – This is where the scheme is contracted out of the state second pension scheme and a proportion of national insurance rebate is paid to the SSAS. Contributions can be paid from the business or members however the scheme is limited to investment of funds in insurance based contracts and cash deposits.
Pension administration experts at Pension Practitioner .Com stated that full SSAS is a huge plus to a company, and that it is best realised by using a purpose driven SSAS tailored to individual company requirements, and under your own control.
Bespoken SSAS only serves the clients’ needs. Established on their behalf and designed and invested as per the clients wishes, often this is used to aid companies leverage finance, and increase their tax efficiency whilst decreasing tax exposure. There are also huge efficiencies when purchasing commercial properties.
Typically Pension Practitioner .Com charge a fixed annual fee. This certainty of cost, is amongst the lowest fee basis in the industry and coupled with their online facilities are likely to remain competitive.
Financial advisors are increasingly looking to this source of pension business as an alternative to SIPPS, in my mind they should consider Pension Practitioner .Com as the chosen administration provider for their SSAS business.
The best way businesses can use their SSAS to beat the credit crunch
According to the UK’s No.1 SSAS administrator, Pension Practitioner .Com “businesses can use small self-administered schemes to loan back money to their company, providing much needed funding”.
Regardless of the press pundits optimistic headlines declaring the worst is over, many small and medium sized businesses when asked the question. “Can you obtain funding or roll-over your credit line without a hike in fees or interest?” The in veritable answer is no!
Analysts at Pension Practitioner .Com state that “there is a dislocation appearing between the apparent positive economic outlook and the reality of the high street.”
Pension Practitioner .Com reported a marked increase in SSAS administration business this quarter, especially for first time inquiries. There are other options in the market, but information provided by financial advisors indicates a tide shift towards SSAS to provide the cash and credit, that the business person needs to keep trading, but at the same time gives a healthy rate of return to the pension scheme.
There are a number of reasons for this trend:
Members are the directors and key employees of the sponsoring employer, and therefore are often the first to identify market changes to their business.
A SSAS has the same rule for contributions and benefits as an insured company arrangement, but as they are investing the assets of the scheme for themselves as members, it is generally perceived by many financial advisors that SSAS has greater control and flexibility over other types of pension schemes.
The management of Pension Practitioner .Com indicated that this is due to a key benefit of SSAS. It can loan back money and assets to the company. This benefits the company and members of the fund (The same persons.).
How it works is essentially simple. Contributions to the SSAS fund are tax efficient and deductable. The company benefits by relieving it’s exposure to tax and gets a most competitive loan (no less than 1% above the base rate). The SSAS does better as it securely makes a loan gaining better returns than it would make with the bank. The SSAS has first charge on the asset to the value of the loan plus interest, and this need not be a company asset.
Pension Practitioner .Com state up to 50% of the SSAS can be loaned to the sponsoring company, for up to 5 years, for both intellectual and physical property.
Businesses are turning to their SSAS pension funds and away from the banks, to cut expenses and get better financing
In conclusion, the trend speaks for SSAS. Informed businesses with SSAS are voting with their feet.
The Credit Crunch - An alternative source of finance for business
Summary
Had HBOS Group been a small business and the directors operated a Small Self Administered Scheme, it is highly likely that they would have looked to the pension scheme for investment to get themselves out of the big hole they found themselves in last week. It is highly unlikely that an investment to the business would be appropriate or indeed been ultimately helpful to them. However, if clients are not a HBOS case, then looking to a small self administered scheme (SSAS) might not only be a shrewd move when seeking cash flow assistance but will also benefit your clients when they finally get round to generating as much income as possible for their retirement.
A small self administered scheme is a pension scheme established by the operators of a business, who appoint themselves as members and trustees. They dictate investment policy and ultimately benefit from the proceeds. That investment policy can range from investing money in gold shares to loans to the business. By having a loan to a business from a SSAS, the small business not only gets tax breaks on repayments but the interest terms and conditions can be set favourably by the pension scheme.
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Few small companies are flush with the type of cash that allows them to weather such a shock as the current turbulence in credit. Going to the bank for cash to keep things ticking over when debtors are slow in settling their invoices is one option but is there a better route? Brad Davis of Pension Practitioner .Com, who are a UK leading specialist for small self administered schemes, gives an insight into an increasingly popular alternative of business finance.
Small self administered schemes (SSAS) were once very popular as they allowed controlling directors of businesses to pump lots of pre-tax profits into them and then lend most of the money back the day after the financial year end. However, successive governments changed the rules to make these schemes less financially attractive. Following a Government wide review of pensions, “Pension Simplification” was born which created a new set of rules for SSAS. An unintended consequence of those changes was that a business entrepreneur could set up a SSAS through their business and control their own pension fund by acting as scheme trustee and invest and manage the funds on their terms. The requirement for actuaries and professional trustees was removed.
The previous restriction that only a limited company could establish a SSAS was also removed. Now an investment business or a partnership can set up a SSAS and provided that there at least one employee is a member of the scheme, non employees such as family can also be admitted.
As the member trustee(s) dictate investment policy, loans to the business are an acceptable “investment”. Indeed, the business could sell an asset to the SSAS for cash or contribute an asset it owns on commercial terms.
As many small business operators may have built up pension funds through past employments or through a SIPP, subject to obtaining the right financial advice, an individual may transfer those funds to a SSAS. Provided that the funds transferred do not consist of protected rights, half of those funds can then be loaned back to the business.
The rules for a loan to a business from a SSAS are that the loan can be used by the business for any purpose. The loan term is for a maximum five years, with a commercial rate of interest set by the trustees, but no less than an HMRC minimum rate. A first charge over an asset of equal value is required, but the nature of the asset charged can be very flexible; it does not have to be an asset of the business. This can therefore get around the thorny problem of the bank having a prior charge over the assets of the business. There is flexibility for a roll-over of repayment if the business is in genuine difficulties (useful if the loan is repayable annually in arrears), but this facility cannot be used more than once.
The loan is paid from a pension bank account, which will receive back that money with interest over the term of the loan. The interest benefits the members of the scheme, that otherwise could have been paid to the bank, had the bank been approached for the loan. In making the loan, the SSAS must take a prudent approach to the judiciousness of the loan. Loans to ailing or near bankrupt businesses are not appropriate and indeed, why inject your funds into a business that was unsustainable. For those businesses that are financially sound but who have a cash issues at periodic times a SSAS may well be a shrewd choice.
Welcome to Pension Practitioner blog
This site gives our thoughts on topical issues of the day for the very many SSAS schemes that we administer. It ranges from the incredulous stories of “I inadvertently booked our holiday through the pension scheme bank account, can I treat this as an expense of my SSAS ?” to the more mundane - “Looking through my rules, if SSAS allows me to do more things than a SIPP why did I never hear of them before?”
Nothing in the site is a recommendation, offer, inducement or solicitation but is intended to be an informative and topical blog of the Pension Practitioner .Com pension specialists. Remember, we are not financial advisors, do not give investment or product advice of any kind.
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