Technical: SSAS funding and other considerations
16 April 2020
Stephen McPhillips, technical sales director, Dentons Pension Management Limited,examines features of SSAS that distinguish them from SIPPs but which can cause confusion.
Small self administered schemes (SSAS) continue to be a popular choice for small and medium sized company business owners / managers. The reasons for this are many and varied. For example, a SSAS can make loans to an employer involved with the scheme and there can be economies of scale for multiple member schemes (compared to a number of individual self invested personal pensions (SIPPs)). However, given their legal structure as occupational pension schemes, there are other features of SSAS that further distinguish them from SIPPs but which can cause confusion. This article seeks to examine some of these issues and to address questions, which stem from some differences in practice between providers.
Funding – employer contributions
As a “registered pension scheme” a SSAS is subject to the same contribution rules as any other. This means, amongst other things, that tax relievable contributions are constrained by the Annual Allowance (AA) – currently £40,000. Of course, the AA is an individual allowance that relates to each member separately. It is necessary, therefore, to be able to identify the split per member of each contribution to a SSAS. If the split of the contribution is not identified at the time of payment into the SSAS, logic dictates that it is impossible to test the contribution against the member’s AA (and any Carry Forward capacity) at that point in time. This, in turn, makes it impossible for paraplanners and advisers to guide clients on potential tax charges that might arise where the AA is exceeded.
Taking this a step further, if the contribution split per member is unknown at the time of payment, then logic would also dictate that the split of the overall fund per member cannot be properly calculated. If the fund split cannot be identified, it follows that it would be impossible for paraplanners and advisers to guide clients on cash flow forecasting, the likelihood of breaching the Lifetime Allowance (LTA), potential tax charges and so on.
A further key consideration is the possibility that a member of the scheme dies before the contributions are allocated. It is not possible to allocate contributions posthumously, which means that beneficiaries may not receive death benefits at the level they may have been expecting.
For the reasons outlined above, the majority of SSAS providers will always take care to ensure that the contributions to a SSAS are:
1. clearly identified across the membership at the time of payment
2. not excessive in relation to the AA and any Carry Forward capacity per member
By way of an example, consider the difficulties that could arise if an employer makes a contribution of, say, £500,000 into a SSAS that only has two members. How would it be possible to ensure that the AA is not being breached if the split of this £500,000 is not known? How would it be possible to track each member’s share of the SSAS fund value if the split of the contribution is unknown?
Funding – split of fund between members
Assuming that the contributions are allocated to the scheme members as and when they are paid, and that any incoming pension transfers are properly allocated to members, it is possible to accurately calculate the overall split of the fund between the members at any point in time. The calculation can be highly complex and needs to take into account any new monies received per member, the timing of these, as well as any outgoings per member (e.g. pension commencement lump sums, income payments and so on) and the timing of these. With the necessary skills, the calculation can, and should, be carried out at least annually and the results communicated to all members. Once again, if this information is not made available to members at least annually, it becomes impossible for paraplanners and advisers to guide clients and to plan appropriately. In addition, members will not know the value of their accumulated pension fund (any may not appreciate the value of the scheme to them as a result).
Given that the split of the fund between the members can be so accurately assessed, there should be no question of any proportion of a fund being reallocated from one member to another, nor there any question of fund growth being reallocated to other members. Either of these acts could constitute an unauthorised member payment, with the attendant tax charges. Section 172 and / or section 172A of Finance Act 2004 deal with such unauthorised member payments.
As noted earlier, there can be significant differences in practice between providers. These differences can cause paraplanners and advisers some confusion, particularly where a provider promotes a facility that most others do not. Naturally, this leads to questions around the efficacy of certain approaches and the potential impact on clients. It is therefore, incumbent upon the paraplanner / adviser to satisfy themselves that the approach they recommend to clients is one that is suitable for their needs and requirements. In turn, that is likely to result in searching questions being asked of any provider that seems to be swimming against an industry tide.
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