July/Aug 2019
EDITION

VIEW ONLINE
SUBSCRIBE

Register with PP

Newsletter, Jobs & Event Alerts

Latest

Technical: Turning an EPP into a SSAS

4 May 2017

In this case study, Nigel Bennett of InvestAcc, explains how an old executive pension plan (EPP) can become a modern small self-administered scheme (SSAS), helping widen investment options whilst preserving A-day entitlements.

Jeff is a successful business owner; he established an EPP in 1994, primarily because at the time the rules allowed him to make higher contributions, he was also interested in the possibility of future commercial property purchase. The EPP scheme trustee is Jeff’s Limited Company, which also acts as scheme administrator.

Since pensions simplification in April 2006, the EPP contribution limits have been the same as all other registered pension schemes. Jeff has discovered that the insurer no longer offers self-investment, so he asks his adviser whether he can transfer to a self-invested personal pension (SIPP) or SSAS as he now wishes to purchase a commercial property using his pension fund.

The adviser learns that whilst he can transfer out of the EPP without penalty, Jeff would lose entitlement to his pre-A-day pension commencement lump sum (PCLS), which in this case is considerably more than 25% of the funds. The adviser considers other options in order to protect his PCLS.

Scheme takeover

The EPP has only one member and is written as a standalone scheme; unfortunately the insurer will not allow further members to join the scheme. This prevents Jeff from adding someone who could make a block or ‘buddy’ transfer with him. Sometimes in these cases it is possible to add a friend or relative so that they can both transfer out of the same scheme, to the same scheme, at the same time, taking advantage of the block transfer rules which apply even where the second member does not have a protected PCLS entitlement.

Fortunately the adviser is aware of a ‘scheme takeover’, typically used when switching SSAS providers but also possible for some EPP schemes. The adviser requests copies of the scheme documentation in order to assess whether the schemes rules allow the scheme to be changed. Once he has these documents it should be a relatively straightforward exercise to find the ‘power of amendment’ or such similar clause. Provided the scheme is not a master trust, and the documentation has the required powers, then it should be possible for their preferred SSAS provider to look at taking over the existing scheme.

A takeover can be very efficient as it is neither a transfer nor switch, the same registered pension scheme remains in place but it is ‘converted’ to a SSAS at the same time as switching ‘provider’.

Can all EPPs be converted to SSAS?

Unfortunately some EPPs cannot be converted, such as:

  • Those written under master trust arrangements (common with some insurers)
  • Those where the scheme documentation cannot be found and where no copies exist
  • Those where the scheme documentation requires any changes to be made with the consent of the sponsoring employer, where the sponsoring employer either no longer exists or where permission would not be forthcoming
  • Where the EPP scheme has already been wound up and where the benefits have been assigned to the member

Conversely, and fortunately, many schemes are capable of takeover, although in some cases the underlying policy may also have some conditions that require permission of the insurer for their removal.

What are the benefits?

There are numerous advantages of a scheme takeover, such as:

  • There is no need to move the scheme or its investments
  • No time ‘out of the market’
  • The scheme can continue, without the costs and time required to establish a new one
  • Existing benefits can remain unaffected, such as protected PCLS entitlement
  • It could save in-specie transfer / re-registration costs
  • It could mean that underlying policies, with market value adjustments / penalties / guaranteed annuity options can be retained, their value will be included when calculating borrowing limits
  • As this is not a transfer, advisers who do not have transfer permissions may still be able to advise, provided they have sufficient knowledge (although this should be approved by the adviser’s compliance department)
  • Switching to a SSAS also entailed appointing a professional trustee and scheme administrator, removing the burden from Jeff’s company

In this case, Jeff’s adviser was able to come up with a solution that allowed him to retain his higher PCLS entitlement whilst allowing him to purchase bigger business premises, securing the site for the future.

 

Comments are closed.