On the face of it, the pool of potential small self-administered scheme (SSAS) clients is quite high.
The UK boasted 5.6m micro businesses with nine or fewer employees in 2019, and there will be many thousands more in the next category of ‘small’ businesses that fall under the 11-member limit for setting up a SSAS scheme.
Extending this further, SSASs are also a viable option for groups of directors of larger businesses that may wish to keep their retirement savings separate from other employees. So altogether this is a big number.
What’s holding back SSAS?
There are various estimates of the number of SSASs currently in existence, but it is likely to be somewhere around the 25,000 mark. So, given the potential size of the market, why is this number not bigger? This is predominantly down to the specialist nature of a SSAS.
The target market for SSAS starts with entrepreneurs and/or family-run businesses which feature in many advisers’ client rosters, who need funds to help them grow their business. A SSAS offers two key ways of investing back into a business: purchasing the business’s premises; or using the loan back facility.
However, the market quickly narrows down as using a SSAS to provide funding involves risk and cost – often more of both than many are prepared to accept. These transactions are complex and require robust systems, controls and experience to manage properly, and as a result, the cost of running a SSAS can be much higher than other retirement savings options. This may deter potential clients.
There is, of course, the obvious reason, and that is simply that many business owners will not have any need for this level of flexibility. However, things can change quickly.
Importance of advice
Despite being very well known within the pension industry, most business owners and directors will have never heard of a SSAS before, and those that have are unlikely to fully appreciate the benefits a SSAS could bring to their business. The importance of advice for these business owners is therefore crucial; an adviser is essential throughout the lifecycle of a SSAS to make sure the scheme works well – not only as a vehicle to fund business plans but also and principally as a retirement vehicle.
What’s the value of a loan back?
As mentioned above, SSASs are recommended by advisers when there is a business need, typically posed as a business goal and/or a related funding requirement. Frequently a loan back is a viable solution for these business owners, and many of the SSASs we set up use this facility.
In essence, a loanback from the trustees of a SSAS to a sponsoring employer can provide an incredibly neat solution to business financing that also addresses the pension savings needs for its members. A SSAS can, therefore, enable advisers to become problem-solvers for a key group of clients, offering both a pension and business funding solution.
Of course, a business seeking financing can usually go to a bank and obtain a loan, but it will be paying that interest to the commercial lender. Often it makes sense to instead loan up to 50% of their retirement savings back into the business, with the interest payments going back into the overall retirement pot for the benefit of the members rather than into a bank’s back pocket.
The loan back does, however, come with significant requirements that need to be policed in order to stay ‘onside’. These are summarised as follows:
- There is a maximum loan limit of 50% of the SSAS net assets
- The maximum term a loan can have is five years
- Security must be in place to underpin the loan, in the form of a first charge of sufficient value to cover the loan amount plus interest
- The repayments made in every year must be at least an amount equal to the total capital and interest repayments payable in total, spread equally over the term of the loan. In other words, you can’t reduce your repayments in any given year beyond an annual minimum.
- The interest rate must be at least 1% above the current base rate, though a higher rate of interest can be agreed if it is on commercial terms
There are a lot of factors and moving parts here that the trustees and their advisers have to keep on top of; the consequences of failing to do so are severe with at least a 40% tax charge being levied on the ‘failed’ amount. The importance of choosing the right provider is therefore critical.
Advisers will, of course, be familiar with these requirements and fully understand the importance of selecting the right SSAS provider when making a recommendation to their clients. Despite the SSAS itself remaining outside of direct regulation from the FCA, policymakers and regulators are placing increasing emphasis on suitability and scheme governance.
It is essential that advisers have confidence that their chosen provider will deliver on their promises, and that members (who will become trustees) understand their own responsibilities in running the scheme properly, including the need for ongoing advice.
So, what makes the right SSAS provider? Many things of course, amongst them they must have experienced staff; robust controls and embedded processes in order to ensure that the many pitfalls are avoided. This is especially true when it comes to loan back arrangements, as a robust level of monitoring and ability to identify early signs of failure are essential to avoid unwanted tax penalties.
All advisers rightly ask tough questions of SSAS providers to make sure that these boxes are ticked before they take the risk of placing business with them. After all their ongoing relationship with the client may depend on the service their clients receive from the SSAS provider they have recommended.
Andrew Phipps is product marketing manager at Rowanmoor