It’s pleasing to note, in an ever-changing pensions landscape, that two types of pension scheme have survived the test of time. The small self administered scheme (SSAS) celebrated its 40th birthday this year whereas its sibling, the self invested personal pension (SIPP), celebrated its 30th birthday this year also. The ground rules for SSAS were laid down in 1979 and the concept of SIPPs was introduced in 1989.
Any birthday warrants celebration, but in the pensions world, the continued existence and some would argue, continued growth, of products that are decades old is indeed a cause for celebration. This is especially true of products that have, at times, suffered challenges as they have grown over the years. Growing pains aside, advisers recognise that SSASs and SIPPs still have a firm place in the accumulation and decumulation phases of their clients’ lives and they continue to recommend them in the right circumstances. Throughout this article, I will refer only to defined contribution SSAS, as this is by far the most common method of operating such a scheme.
As close relatives, how alike are they?
We know that there is a 10 year age gap between SSASs and SIPPs, but, given that they share DNA, it’s sometimes not that easy to tell them apart. The resemblances are quite remarkable in some cases.
Take, for example, when it comes to commercial property purchase. In isolation, SSAS and SIPP can be viewed as identical. That’s good for advisers because their knowledge of one translates easily into their knowledge of the other, even though the adviser may never have encountered the other to date. It is of little relevance or consequence that one “sibling” is a decade older than the other.
The concept of siblings can be extended further. Let’s take the example of benefit limits; both SSAS and SIPP share the same lifetime allowance (LTA) and the same benefit crystallisation events apply to each. Once again, that’s good for advisers because it makes knowledge of one transferrable to the other.
Similarly, the same contribution limits apply to each; the age difference between the two confers no advantages of one over the other, despite how a small section of the industry chooses to interpret things.
How do they differ then?
Even the closest of siblings have characteristics and traits that set them apart from each other. The most obvious differences are that they have different names and different legal identities and structures. That, in itself, can be helpful to advisers in distinguishing the two from each other, even though they may look like each other.
Beyond the names and legal identities, things can become trickier. The real traits and characteristics of each will only come out after experience of spending time with each and getting to know them.
That experience of dealing with each might reveal, for example, one’s ability to lend monies to a connected party; in our analogy here, the elder of the two can do so, but the younger one cannot without tax charges arising. In the case of investment in shares of a company owned or controlled by the SSAS or SIPP member, the elder is constrained by a 5% self-investment restriction dating back to 1991 that does not apply to the younger.
As in any walk of life, knowledge aids understanding and, getting to know and understand the nuances of SSAS and SIPPs can help an adviser to guide clients effectively. If it’s possible to get help from someone who has known the two siblings from birth, that should help advisers even further.
Stephen McPhillips is technical sales director at Dentons Pension Management