Far from being a dead duck post pensions A-Day in 2006, as many had predicted, small self-administered schemes (SSAS) continue to retain their popularity. Some advisers are recommending SSAS to clients for the first time in their careers, as its benefits for owner / managed businesses are recognised more and more. Given the fact that HMRC’s registration timescales for new SSAS are measured once again in terms of weeks rather than months, it all adds up to a positive picture for a type of scheme which is now 40+ years old. SSAS is ageing well.
Brevity demands that this article does not delve too much into the benefits of SSAS over its close cousin, a self-invested personal pension (SIPP) and the investment differences between the two. However, one of the key differences and advantages of a SSAS over a SIPP is the pooled nature of the accumulated pension pot where there are two or more members in a SSAS. This can lead to more efficient running costs, as well as efficiencies and cost savings in making assets available to retiring / exiting members.
For example, bricks and mortar which may have been historically held within the SSAS for, say, mum and dad, can be held for son and daughter in the future, in exchange for other (probably more liquid) assets of equivalent value. Putting some numbers around that, let’s say that the property is valued at £200,000 at the point of notional reallocation to son and daughter. Son and daughter must have at least £200,000 of assets and benefit entitlement within the SSAS for the exchange to be effective without tax charges applying to the members.
In the above example, if son and daughter have less than £200,000 of benefit entitlement within the SSAS, then allocating the property to them in its entirety will represent a shifting of value from one member to another. Such shifting of value between members in a SSAS is only ever likely to take place between connected parties, often for tax avoidance purposes, and falls foul of legislation designed to discourage it.
This leads onto another feature of a SSAS which appears to be misused by a very small section of the provider community – allocation of fund growth between the members. The pooled nature of a SSAS can mean that there are investment returns from a number of different assets within the scheme – for example, rental income on a property, loan interest on a SSAS loan to the employer, bank interest, growth on a portfolio of collectives and so on.
In many instances within a SSAS, the average growth achieved over all of these assets will be calculated annually and applied to the members’ funds proportionately based on their respective shares of the fund at the start of the year (but also allowing for new monies being introduced per member and any withdrawals / expenses). Needless to say, this can be a complex calculation.
However complex it may be, it can, and should, be calculated accurately to ensure that each member benefits only in line with their actual entitlement under the scheme. It should be communicated to all scheme members at least annually, otherwise members will be in the dark regarding the value of their pension pots, their proximity to the lifetime allowance limit and so on.
I occasionally hear of instances where a provider promotes the ability to reallocate investment growth disproportionately to certain members. Often, this is promoted as a vehicle to avoid a member breaching the lifetime allowance limit. It seems that what isn’t made clear to the adviser and member is that such reallocation is likely to be value-shifting, which would be caught by the same legislation as applies in the above example and give rise to tax charges.
It’s interesting that, in a still fairly crowded market, only a tiny proportion of providers choose to swim against the tide and offer / promote such a facility. Some may claim that their practices have been implicitly accepted by HMRC because it has allowed registration of new SSAS using its documentation, but deep down, that documentation might not actually permit it and even if it does, it might well be value-shifting. Be cautious!
Stephen McPhillips is technical sales director at Dentons Pension Management