Stephen McPhillips, technical sales director, Dentons Pension Management Limited, looks further at where SIPP and SSAS are pitted against one another and clarifies some of the messaging around both.
In my previous article for Professional Paraplanner, I looked at some aspects of self invested personal pensions (SIPPs) and small self administered scheme (SSASs) which have been unfairly described in some quarters (i.e. by some providers who only offer one of these and promote it at the expense of the other). In this article, I am going to cover some other aspects where the two close cousins might be pitted against each other, but in a biased manner by some providers.
Loans to sponsoring employers
One of the clear advantages that a SSAS has over a SIPP is the ability to lend monies to an employer which participates in the scheme. SIPPs cannot lend monies to a connected party directly or indirectly.
What a SSAS-only provider might not be quick to point out, however, is that the requirement for the loan to be secured by a First Legal Charge is often one that will rule it out straight away. The asset(s) offered as security must be sufficient to cover both the loan capital and the interest which will accrue over the term of the loan.
When it comes to the matter of which asset(s) will be used for the loan security, care needs to be exercised where the SSAS provider will allow things such as shares in the borrower’s company, plant and machinery, intellectual property (IP), a debtor’s book and so on. Why ? Well, if we think through a situation where the security has to be called-in by the SSAS trustees, it is highly likely that the borrower’s business is failing/has failed. That being the case, how much are the shares in the company likely to be worth ? Similarly, the borrower’s IP may be worth far less than anticipated. If the SSAS trustees take possession of plant/machinery, this is very likely to classed by HMRC as “tangible moveable property” and hence taxable once in the SSAS trustees’ ownership.
This all matters because any loan/interest monies that cannot be recovered by the SSAS trustees become an unauthorised payment to the sponsoring employer (borrower) and subject to tax charges. If the borrower cannot pay the tax charge, these then will fall upon the SSAS trustees. The result; not only are some scheme assets lost, but there may be tax charges on top to compound the problem. Each of these will deplete the member(s) pension fund value.
It is for the above reasons that some SSAS providers will only permit the security to take the form of bricks and mortar and/or land – as there is usually more certainty of value with these (even in the event of the demise of the borrower) compared to some of the assets listed above.
Unquoted shares in sponsoring employer
I have seen some output from SSAS-only providers which states that SSAS trustees can invest up to 5% of the SSAS fund value in shares in a single sponsoring employer (and up to 20% if there are 4 different sponsoring employers), but that SIPPs could not acquire these shares.
Firstly, the occupational pension scheme self investment restrictions that apply to SSAS (but which don’t apply to SIPPs), mean that no more than 4.99% of the SSAS fund value can be used to acquire shares in a single sponsoring employer. It follows, therefore, that no more than 19.96% of the fund could be used where there are 4 different employer’s shares. As SIPPs are not subject to these self investment restrictions, then in theory, 100% of the fund value could be invested in shares in the client’s company.
However, in practice, sound due diligence by the SSAS/SIPP provider is likely to rule-out acquisition of the shares in either vehicle because of the taxable property rules which require a ‘look-through’ of the shares to see the underlying assets which the company owns e.g. company cars, vans, computer equipment, etc. (all of which would be taxable if owned directly or indirectly by the SSAS/SIPP). In addition, care needs to be taken to ensure that the SSAS/SIPP is not in a position to exercise control over the company. Even a relatively modest shareholding by the SSAS/SIPP could give it a casting vote when used in conjunction with connected parties such as the scheme member as an individual, family members, fellow directors and so on.
Common trust fund/pooling of assets within a SSAS
It is sometimes stated that, because a SSAS can have multiple members (up to 11), and because they all participate in the one scheme, then there can be cost savings compared to individual SIPPs holding a part share in the one investment e.g. commercial property. Whilst this can certainly be true (depending on the provider’s charging structure), it should also be borne in mind that some SIPP providers charge their property purchase fees per property rather than per SIPP and this can make a property purchase attractive and cost-effective in SIPPs. For example, let’s say that the SIPP provider’s property purchase fee is £1,000 and there are 4 SIPPs jointly buying the property. Each would pay a percentage of the provider’s £1,000 fee, rather than all paying £1,000 each. Hence, it is possible to achieve economies of scale in both SIPP and SSAS – depending on the provider’s charging structure.
Bear in mind also that for some entities, it would not be possible to establish a SSAS e.g. partners in a partnership could not be members of a SSAS if the partnership created one, and so the SIPP route would have to be used.
In conclusion, and to reiterate the comments in my previous article, both SIPP and SSAS have their parts to play in retirement planning strategies for clients. The most appropriate vehicle to recommend to a client should rest solely on his/her requirements – rather than a provider’s assertion that one is far superior to the other!
