What happens where members of a SSAS wish to proceed with an investment which is not in alignment with the SSAS’s investment strategy, such as commercial property? This is where earmarking can be useful, explains Caitlin Southall, Head of SSAS Proposition, WBR Group.
Small self-administered schemes (SSASs) are often used by owner-managed businesses and SMEs as part of a retirement strategy, due to the flexibility they provide to the directors over their pension funds. This includes the ability to make investment decisions that align with their business goals.
Up to 11 members can pool their pensions into a combined fund, presenting an opportunity to maximise investment opportunity. For example, one director’s SIPP may not be able to acquire the company’s business premises, but collectively all or a number of the directors, could together purchase the property via a SSAS and continue to have decision making powers. A SSAS is typically held under a common trust structure.
Allocations within SSASs are determined based upon the contributions paid by the principal employer, but it’s not uncommon for them to be held on an equal basis. From an administrative perspective for both the provider and the members, this keeps things simple and reduces the risk of administrative challenges, or inter-member disputes over the assets later down the line.
However, there might be instances during a SSAS where certain members wish to proceed with an investment which is not in alignment with the SSAS’s investment strategy. These strategies evolve and change over time dependent on the individual members’ needs, and therefore it is understandable that at some points, the investment aims for the collective SSAS members, may not be completely aligned.
There is a potential solution in these instances – earmarking assets. Earmarking refers to the process of designating specific assets to only some members of the SSAS. For example, one member may hold an interest in a commercial property, however the other 4 members of the SSAS do not hold any interest in this asset. In this way, the income and gains relating to the earmarked asset are allocated only to the member to who the earmarking relates.
Whilst in essence the process to earmark assets is simple, there are some steps that should be taken to minimise administrative issues and avoid any disputes later down the line between the SSAS members. Perhaps most importantly, any earmarked assets should be documented, with a clear agreement from all the SSAS members and trustees, remembering that this is usually achieved by a trustees resolution. The risk here is that if earmarking is undertaken verbally, that any such agreement could be disputed at a later date or forgotten. In my experience, most professional trustees will insist on documenting earmarked assets. This also ensures that all the SSAS members are in agreement with the arrangement.
Likewise with any changes in earmarked assets. In the event that other SSAS members want to invest in those assets in the future, these amendments should also be documented and agreed amongst the members, and trustees. Documenting key agreements like this is good order for trustees. It might be the case that any changes to the earmarked asset might require specialist advice (i.e. an accountant or property surveyor).
Any earmarking processes should be documented in the scheme documentation, so all parties are aware of what they are, and aren’t able to do from the outset of the scheme.
Processes such as pension sharing orders, or payment of death penalties are theoretically the same for earmarked assets. However, if the earmarking is not documented correctly, events such as these can be difficult for trustees to calculate. Professional trustees are likely to be best placed to deal with these challenges.
There may be increased annual costs involved when there are earmarked assets held within the SSAS. The reason for this is likely to be the increased administration for activities such as fund splits. When the pooled assets are held in equal shares across the SSAS members, processes such as issuing annual statements, change in SSAS members and winding down the scheme will be more straightforward then when there’s earmarking involved.
With the proposed changes to IHT and pensions currently under consultation but expected to take effect from April 2027, earmarking might be a more common option for SSAS clients. As the needs of the members change, earmarking may provide a solution for those members who are perhaps nearing retirement, and want to secure a low risk, income producing strategy through the use of certain assets. Other members who are in the earlier accumulation stage may not feel that such an asset would be appropriate for them.
Earmarking would allow some of the members to invest in such an asset, whilst leaving the remaining members to invest in other assets. It’s important to note however that a SSAS is designed to provide a vehicle for pooled planning for mutually agreed investment strategies. Earmarking assets is the exception, as opposed to the rule, so if individuals have markedly different investment strategies from the outset, they may perhaps be more suited to a SIPP in order to achieve their intended outcomes.
Earmarking provides an element of flexibility to the SSAS members, without directly impacting the overall SSAS investment strategy. The success of the earmarking process is however underpinned by ensuring compliance with the trust deed, and clear documentation of the agreement of all scheme members, before proceeding.
Main image: lorem-cpXw2cLTYPY-unsplash
