Small Self-Administered Pension Schemes (SSAS) remain a popular choice for business owners and family enterprises seeking flexibility and control over pension assets. Their appeal lies in the ability for members to act as trustees, enabling direct oversight of investments and decisions. However, this structure brings unique challenges, particularly as trustees age and questions of mental capacity arise, says Mark Plewes, Head of Pensions Technical, WBR Group.
SSAS trustees often remain in post for decades, reflecting the long-term nature of pension planning. While such continuity can be beneficial, advancing age introduces risks.
Cognitive decline, whether gradual or sudden, can impair a trustee’s ability to discharge fiduciary duties. Dementia and related conditions are increasingly prevalent; with the Alzheimer’s Society predicting that over one million people in the UK will be living with dementia by 2025.
For SSAS, where decisions must typically be unanimous, the incapacity of one trustee can effectively paralyse the ability of the trustees to make collective decisions on the scheme, potentially halting new benefit payments, investment decisions, and having potential impacts on compliance with wider pensions legislation, including the 1995 and 2004 Pensions Acts.
Unlike large occupational schemes with corporate trustees, SSAS governance relies on individuals. This amplifies the impact of incapacity and underscores the need for proactive planning.
Legal framework and trustee duties
Trustees of SSAS are bound by trust law and pensions legislation, including the Pensions Act 1995 and the Trustee Act 1925. Their duties around loyalty, prudence, and acting in beneficiaries’ best interests are uncompromising. Mental capacity to understand the nature and impact of their decisions is central to fulfilling these obligations. Under the Mental Capacity Act 2005, capacity is assessed functionally – in other words, can the individual understand, retain, and weigh relevant information to make decisions?
Removal mechanisms depend on the scheme’s trust deed and rules and where the Principal Employer retains the power to appoint and remove trustees then whilst this may offer a short-term solution, the scheme would immediately find itself no longer classed as a Relevant Small Scheme for the purposes of the Pensions Act 1995. Under these circumstances it would find itself subject to increased regulatory obligations as well as restrictions on Employer Related Investments (ERIs) such as employer loans or employer tenanted property.
Where the scheme rules are silent or where the power to appoint and remove a trustee vest in the trustees themselves, then statutory routes under the Trustee Act 1925 or an application to the Court of Protection may be required, particularly if the trustee has a beneficial interest in the scheme. This process can be time-consuming and costly, creating operational and financial strain.
Why LPAs are not a panacea
One line of enquiry which we consistently see from clients and their advisers is around the use of a Lasting Power of Attorney (LPA) for property and financial affairs in these situations. Indeed, it is a common misconception that a LPA enables an attorney to act as a trustee whereas in reality, LPAs do not confer trustee powers. Section 25 of the Trustee Act 1925 governs delegation of trustee functions, permitting a Trustee Power of Attorney (TPOA) for up to 12 months, typically to cover temporary absence (e.g., overseas travel). Crucially, this authority lapses if the donor loses capacity. Therefore, neither an LPA nor a TPOA offers a long-term solution for incapacity in SSAS governance.
Historic Enduring Powers of Attorney (EPAs), created before October 2007, could extend trustee authority in limited circumstances, but these are now rare. The practical implication is stark, if a trustee becomes mentally incapable, attorneys cannot step into their shoes for trustee decisions. The only viable option may be removal and replacement, subject to the trust deed or court approval.
Mitigation strategies for trustees and advisers
Being proactive in relation to a client’s long term financial affairs is essential and where the client is also a trustee of their own SSAS, proactive governance of any pension scheme is a key part of this.
When considering steps that might be taken in respect of a client who has the potential to lose capacity over time then there are several key points to be considered. These include reviewing the scheme documentation and in particular the trust deed to ensure that they contain clear provisions for removal and replacement of trustees who lose capacity in the worst-case scenario.
Trustees should also understand the limitations of LPAs and TPOAs, in particular in relation to which decisions they may cover and when they may be ineffective. Planning around whether a member continues to hold their funds in an arrangement where they are a trustee will also form part of this. Financial advice should be sought about ongoing membership or whether transferring benefits to an arrangement where the member is not required to be a trustee (such as a SIPP written under Master Trust) may be in the member’s interests.
Encouraging trustees to consider any succession strategies early and engage with their co-trustees, in particular any professional trustee, is key to this process so that action can be taken ahead of time. Where incapacity arises, and could not have been anticipated in advance, seeking specialist advice promptly can also be of considerable assistance.
SSAS trusteeship offers control and flexibility but ageing and incapacity introduce complex legal and practical challenges. LPAs, while invaluable for personal affairs, do not extend to trustee functions. Without foresight, schemes risk paralysis at precisely the time members need certainty. For trustees and advisers alike, the message is clear: plan early, educate thoroughly, and embed robust governance to safeguard both the scheme and its members.
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