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Pensions and business exit planning

25 February 2019

SSAS is an ideal business exit planning tool, says Stephen McPhillips, technical sales director, Dentons Pension Management Limited

Small self administered schemes (SSAS) have experienced something of a renaissance over the past few years, despite the increasingly difficult process to have these accepted and registered by HM Revenue & Customs (HMRC). This relatively new process being adopted by HMRC is in place for good reason (for example, to reduce the risk of SSAS being used as the vehicle of choice for pension scammers) and it takes us back to more or less the position which existed for new SSAS registration pre 6 April 2006 (Pensions ‘A-Day’). Hence, it can now take between 3 and 6 months to have a new SSAS granted a Pension Scheme Tax Reference number (PSTR) by HMRC.

Despite this, employers continue to establish new SSAS schemes for key directors and senior employees. There is also a very active market for SSAS ‘takeovers’ i.e. where a professional trustee is appointed to an existing SSAS to replace an underperforming one, or to assist member trustees who have decided that “flying solo” without a professional trustee post A-Day is fraught with too many risks and difficulties. Many advisers will refuse to engage with a SSAS client unless a professional trustee is attached to the SSAS and a number of banks will not provide a trustee bank account unless a professional trustee is in place as co-trustee, joint signatory and joint Scheme Administrator.

So, why are SSAS still popular with clients against a backdrop of increasingly closer HMRC (and other) scrutiny?

One of the answers lies in the flexibility that a SSAS can offer over its close cousin, a self invested personal pension (SIPP). This article aims to explore some of those flexibilities and to outline how a SSAS can be used to create liquidity for members who are looking for liquid assets in order to provide retirement benefits from the scheme, or to provide liquid cash / assets for a transfer out to another arrangement.

Common trust fund

One of the key differences between SSAS and SIPP lies in their differing legal structures. In the bespoke SIPP world, each member’s SIPP is often a sub-trust within the SIPP provider’s master trust structure. Whilst there may be several thousand SIPP members within the provider’s master trust, each SIPP member’s assets should be legally ring-fenced from all other members’ assets. Think of it in terms of a safety deposit vault; all depositors have access to the vault room, but each has an individual key to their own deposit box within the vault and that key opens only their box and they have no knowledge of what sits in all the other deposit boxes in the vault room.

A SSAS, by contrast, usually operates as (what HMRC terms) a common trust fund. This means there is usually one central SSAS bank account and pool of investments and each member within the SSAS could look to any asset within the SSAS to provide his or her retirement benefits or transfer value. Rather than viewing the SSAS as a series of individual safety deposit boxes, it could be viewed as one large deposit box containing a number of the items that a series of smaller individual boxes could hold. It is this pooled approach to investments which can give SSAS a significant advantage over SIPP when it comes to planning for a member’s exit from, or retirement under, the SSAS – particularly where there are relatively illiquid assets such as commercial property and loans to employers within the scheme. Of course, loans to employers are a feature of SSAS that in themselves offer an advantage over SIPP, since SIPPs cannot lend monies to connected parties.

SSAS fund splits / member allocations

Given the “pooled” nature of the investments within a SSAS, one of the first questions that a member might ask is, “How do I know what my share of the pot is at any one time?” It’s a very good question because the SSAS is funded by pension contributions (employer and, less commonly, member contributions) and pension transfers-in. These are rarely ever equal between the members and may come into the SSAS at different times. In addition, investment returns achieved on scheme investments may be building-up as cash in the SSAS trustee bank account to be reinvested in line with the adviser’s investment advice and recommendations. These investment returns will not be shared equally between the members, unless the contributions and transfers in the past have been equal across all members and paid into the SSAS at exactly the same time. This is rarely ever the case.

Clients and their advisers will, naturally, want and need to know broadly how each member’s share of the fund is tracked and reported, given how complicated it could be to calculate this in a scheme where there are several members, each with differing contribution and incoming transfer value patterns.

So, how does a SSAS work under the bonnet when it comes to determining the split of the fund between the members?

While the calculation can be complex, a sound knowledge of actuarial principles will enable a professional trustee to undertake it on behalf of the member trustees. It should always be centred around the amount and timing of contributions and transfers paid into the SSAS and their split between the members at the time of payment. In straightforward cases, the overall rate of return on scheme assets can be applied to each contribution and transfer value received into the SSAS. An efficient professional trustee will not only calculate this fund split at least annually, but it will also communicate it to individual members so that they know where they stand each year. Member trustees should not need to ask a professional trustee to carry out these calculations routinely.

The calculation can be slightly more complex if the professional trustee allows and can accommodate designation of specific assets to specific members. This is perfectly permissible within a SSAS, provided all member trustees agree that course of action. Some assets can be “designated” to specific members whilst others are pooled across all members.

It is this designation (which does not apply in SIPPs) which can assist with exit planning as outlined in the case study below:

CASE STUDY: Exit planning in SSAS

Two member SSAS with commercial property. Members are John and Conor, both directors of an IT Consultancy company.

Conor has decided to retire from the business but wishes to take a cash transfer out of the SSAS into his own personal pension so that there is a “clean break” from the business. John wishes to retain the commercial property within the SSAS because the IT business trades from it. John’s spouse, Anne, is also a director of the business and will take a more active part in the running of it on Conor’s departure. She has her own personal pension arrangement, which is valued at £150,000.

Assets of the SSAS:

  • Commercial property valued at £300,000 (no outstanding borrowing). Split equally between John and Conor i.e. £150,000 each.
  • Cash in trustee bank account of £75,000. Split £25,000 John and £50,000 Conor.

Split of the fund between John and Conor:

  • £175,000 John
  • £200,000 Conor

Problem! There is only £75,000 cash in the SSAS with which to pay Conor’s transfer value, so there is a £125,000 cash shortfall.

Possible solution – the SSAS borrows money to help pay Conor’s transfer value.

Problem! Maximum borrowing based solely on John’s share of the SSAS would be 50% of £175,000, equalling £87,500. Cash available for transfer value would therefore be £162,500 (£75,000 + £87,500), which is still short of the £200,000 required.

Actual solution provided by the adviser:

1. Anne becomes a member and trustee of the scheme, and transfers her £150,000 in cash from her personal pension into the SSAS bank account.

2. The property is professionally valued by a Royal Institution Chartered Surveyor (RICS) Registered Valuer to confirm its open market value of £300,000.

3. The member trustees agree unanimously that the property will be designated to John and Anne – £150,000 to John and £150,000 to Anne.

4. In return for giving up a £150,000 share of the property, Conor accepts a corresponding increase in liquid cash designated to him. His transfer value is still £200,000 and he now has £200,000 (£150,000 + £50,000) in the SSAS bank account.

5. The re-designation of the share of the property from Conor to Anne is confirmed by way of a trustee resolution.

6. Conor takes a transfer value in cash to a personal pension recommended by the adviser.

7. Anne’s share of the scheme fund is now represented by commercial property and will grow in future by receiving 50% of the rent paid into the SSAS and 50% of any increase in the property’s capital value.

8. Land Registry advised of the change in title in that Anne replaces Conor.

First published in the Professional Paraplanner February 2019 issue