Don’t believe some of the arguments in the market as to whether to use a SIPP or SSAS for a client’s pension requirements, warns Stephen McPhillips, technical sales director, Dentons Pension Management Limited.
A few years ago, I wrote an article for Professional Paraplanner that covered the topic of self invested personal pensions (SIPPs) and small self administered schemes (SSAS). I very carefully did not title it SIPP “versus” SSAS because the choice of one vehicle over the other should not be viewed as a competition; the selection of one over the other should depend largely on the client’s circumstances and requirements.
Despite this, it’s not uncommon to see a provider promote one at the expense of another – simply because that provider only offers the one it is seeking to promote. This article will address some of the aspects that pop up from time to time in provider communications.
Capital adequacy (cap-ad)
It is sometimes purported that, because a SSAS-only provider does not have to meet the Financial Conduct Authority’s (FCA) cap-ad requirements, there is greater flexibility afforded to SSAS over SIPPs. This is likely to refer to the fact that the presence of “non-standard” assets (i.e. those which cannot be easily sold within 30 days) within a SIPP means that the SIPP provider may have an increased cap-ad requirement to meet. However, a responsible provider that offers both SIPP and SSAS should apply the same due diligence requirements to both – and if the asset is considered unacceptable for any reason, that decision should apply regardless of whether it’s a SIPP or a SSAS that is being used.
Unallocated contributions
Some SSAS-only providers suggest that, whilst unallocated contributions to SIPPs are not possible (because the member is constrained by the Annual Allowance (AA)), such contributions to SSAS are possible. However, unallocated contributions need to be allocated to members at some point in time (assuming that the member has not died in the intervening period) and these will be tested against the AA at that time (whatever it might be at that time). In the interim, none of the members of the SSAS know how much (if any) of that contribution will find its way to them and, consequently, they will be unsure of their respective shares of the overall SSAS fund value. That must make financial planning work far more challenging for advice firms?
Cross contamination
It is argued in some SSAS-only quarters that a SSAS presents no risk of cross-contamination from other members / schemes since it is a standalone arrangement, separate from other schemes. Whilst that could well be true, it will only be applicable where the SSAS provider does not operate a centralised bank account for all of its SSAS schemes. Anecdotal feedback from advice firms in recent years has shown us that, in some cases, a centralised bank account has been operated for SSAS by a provider. That, in turn, resulted in contributions being incorrectly allocated to the wrong scheme on occasion.
In the SIPP world, it is highly unlikely that a responsible and respected SIPP provider would ever allow cross-contamination from one SIPP member to another to occur; robust systems and controls should ensure that this never happens.
It should also be borne in mind that, within a SSAS, the fund split between the members needs to be calculated scientifically so that each member receives his/her correct share of the fund based on the amount and timing of pension contributions and transfers-in for each member, and the investment returns achieved each year within the scheme. Failure to carry out such calculations accurately could result in scheme members being deprived of their rightful share of the fund (and it could give rise to tax charges).
Regulation
Providers of SIPPs must be authorised and regulated by the FCA. A SSAS-only provider does not need to be regulated by the FCA, although it (and SIPP providers) need to be accepted by HMRC.
Any SSAS with more than one member needs to be registered with The Pensions Regulator.
A SSAS-only provider might seek to argue that, because SSASs are not regulated by the FCA, there is more freedom afforded to the trustees. However, a note of caution should be sounded over a provider that would not accept an investment into its SIPP book (if it offers one) but would allow it into its SSAS book (assuming that it’s not a loan to employer – which can only exist in a SSAS). If, for example, the investment would give rise to tax charges, those tax charges would arise regardless of which vehicle is being used – SIPP or SSAS.
SSAS as a “family” pension scheme
Sometimes a SSAS is promoted as a “family” pension scheme (and more so than a SIPP). There are several aspects for advice firms to bear in mind about this:
• As a SSAS is an occupational pension scheme created by an employer for the benefit of selected directors / employees, it follows that active / deferred members of the SSAS should be employees / former employees of the sponsoring employer. Any family members who are not employees or former employees of the sponsoring employer should not be eligible for membership – UNLESS they become recipients of death benefits arising from the death of a member;
• This ability to pass on pension wealth through pension freedoms (nominees and successors) exists within the SIPP world too (subject to the provider’s proposition structure).
In conclusion, 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!
