Stephen McPhillips, technical sales director, Dentons Pension Management Limited, outlines why, despite some drawbacks since launch, SSASs continue to be useful and popular vehicles.
SSASs have been around for decades (from 1973 in fact). Once a set of ground rules were laid down in 1979, and more products were launched onto the market, SSASs became a vehicle of choice for company directors who wished to make pension provision for themselves, whilst at the same time enabling investment back into their limited company businesses using money in the pension scheme bank account.
In the years leading up to “pensions simplification” in 2006 it was commonplace for SSAS trustees to grant a loan to a sponsoring employer – very often with no security being put in place to secure the lending.
But pensions simplification brought with it a new requirement in relation to SSAS loans to employers; the requirement for the loan to be secured by a First Legal Charge over a suitable asset or assets. Indeed, the value of that security must be sufficient to cover both the loan capital and interest that would accrue over the term of the loan.
For some potential borrowers from a SSAS, this requirement closed the door on this source of finance; if there is no asset available for this function, the loan cannot be granted without unauthorised payment tax charges arising.
If we therefore accept that SSAS loans to employers are more difficult (and sometimes impossible) to arrange than was previously the case, why do some clients still wish to establish a new SSAS?
1. SSASs have more features than just loans to employers
For some clients, a potential SSAS loan to a sponsoring employer might never be a requirement – particularly if the employer is well capitalised and/or if it has positive cashflows. What, then, might be another reason for having a SSAS?
There could be several other reasons to go down the SSAS route. This may be because of its underlying structure and flexibility in comparison to some other alternatives.
2. Economies of scale
A SSAS also might be a more cost-effective vehicle than, say, a collection of self invested personal pensions (SIPPs) all investing jointly in, for example, a commercial property. In view of the fact that a SSAS can be a multi-member arrangement with a pooling of assets across the membership, that could mean that one SSAS with, say, four members in it, could be less expensive to create and administer than four individual SIPPs might be. This, of course, depends on providers’ charging structures, but the potential multi-member nature of a SSAS can make it an attractive proposition from a simple cost perspective.
Talking of costs, in view of the fact that a SSAS is an occupational pension scheme created by an employer, the initial and ongoing costs of administering it can be met directly by the employer and deducted as a tax-relievable business expense.
3. Intergenerational planning
Cost efficiencies might not be the main driver for a SSAS though. In fact, a SSAS might cost more than an alternative vehicle. What other reason might a client have then for selecting, or being recommended to have, a SSAS?
Once again, the potential multi-member and pooled nature of a SSAS could provide an element of flexibility for clients that other alternatives don’t. By this, I am referring to the fact that a common pool of assets can mean that the trustees have flexibility to use more liquid assets for benefit/transfer payments than might otherwise be the case.
Take, for example, a SSAS which has four members; mum and dad and their son and daughter. Let’s say that there is a SSAS-owned property valued at £150,000 which has historically been allocated to mum and dad. Let’s also assume that son and daughter have built benefit entitlement within the SSAS to the value of £150,000 and that their SSAS-owned assets take the form of liquid assets (such as a platform portfolio). Provided that it is supported by a Registered Valuer’s capital valuation at the time, the property can be quickly and easily notionally reallocated from mum and dad to son and daughter within the SSAS in exchange for liquid assets to the same value. That might enable the efficient payment of retirement benefits to mum and dad, whilst at the same time passing the property down to the next generation within the SSAS. In addition, on death, the property can be passed down from, say, mum and dad to the children (as nominated beneficiaries) without it leaving the scheme.
It’s therefore no surprise that SSAS continues to have a place – in the right circumstances.
First published in Professional Paraplanner as: Why is SSAS still a popular choice for paraplanners?
