Small self-administered scheme (SSAS) pensions came into being way back in 1974 in the depths of the three day week when Britain was still the ‘the sick man of Europe’.
The SSAS market grew exponentially during the 70s and 80s in a time when income tax and interest rates were much higher than they are today, and business finance was much scarcer than it is today.
The SSAS proved an ideal vehicle for co-directors within a business and with common investment aims. Many boards of directors wanted the flexibility to purchase pension-able assets jointly and borrow against SSAS-held assets to expand or protect the future of the business.
They have often been treated as family pension trusts. In this context, they can hold and use the pension savings of a family in the interests of the business, while also providing a medium for core business-related assets to be passed onto the next generation tax efficiently.
‘Key and unique features’
A SSAS enabled a business to place its business premises in a pension wrapper and then borrow up to 50% of the total asset value of that property, less any pre-existing borrowing. For example, if the SSAS has assets worth £1m and £200,000 has already been borrowed against this value, then any further borrowing must be limited to £300,000, and total borrowing would be £500,000.
Further, trustees can also use 100% of the scheme’s assets, plus any loans for business asset purchase – so SSAS trustees have access to funds equivalent to up to 150% of the value of the scheme.
These are key and unique features to SSASs but how do they stack up against the view which many business owners take today that they want ready access to their assets at a moment’s notice? Cash is king after all, particularly during the period of the global pandemic.
Many of the advantages of pension-based savings apply also to SSASs. Let’s explore a few of them:
1. Tax-free compounded growth
SSASs, like all pensions, benefit from being non-taxable at point of entry (within annual contribution limits of course). More importantly, compounding annual growth of SSAS-held assets all rolls up in a tax-free environment until withdrawn. After all, it’s not timing the market that counts for most of us but time in the market.
2. Tax rate in retirement normally lower
Many owner-managers of businesses who are members of SSASs may be higher rate taxpayers in the good years, and hopefully in those last few years of work. However, once retired, earnings will normally fall significantly – reducing the tax chargeable on retirement income as it’s decumulated.
If all your money sits outside a pensions wrapper, you will need to worry about the potential for wealth taxes to be imposed on you as a potential top earners. We’ve been there before in the 1974-79 period when Dennis Healey was Chancellor of the Exchequer.
Healey, who was famously quoted as saying he aimed to tax the rich ‘until the pips squeaked’, imposed a top rate of income tax of a staggering 83% in 1974. He even added an investment income tax surcharge of 15%, pushing the top rate of tax up to 98% for the super-wealthy of the day.
3. ‘Rishi-proofing’ your assets
Arguably, the UK’s finances are heading for an even tougher battering than we saw in the early 1970s when we had to go cap in hand to the IMF to get bailed out. After all, Rishi Sunak will have to contend with a loss of an estimated £26bn on already-predicted defaults on those Bounce Back Loans. As much as 90% of the 1.2m loans (with a total value of £36.9bn) went to micro-businesses. And despite the best efforts of their owners, many may simply fold as the effects of the pandemic run longer and deeper than they originally expected.
The furlough scheme has been a lifeline for many workers. However, with the extension of the Job Retention Scheme until March next year, it’s predicted to cost the government a further £48.6bn by the time it closes. The total hit from the pandemic, in terms of tax receipt losses and business and jobs support packages, could exceed £300bn.
How might inevitable tax increases play out in the Chancellorship of Rishi Sunak once the pandemic is under control and HM Treasury needs to begin refilling its denuded coffers? Reforms to Capital Gains Tax are already widely predicted.
One way of ‘Rishi-proofing’ your money is to talk to your IFA about sheltering more of it in assets within a SSAS and you might want to consider doing that before the next Budget in March 2021.
4. Spreading the wealth
The SSAS is also a tax efficient vehicle for spreading wealth more thinly. Grandpa might use his SSAS to spread assets across to his spouse and apportion it through to his children and grandchildren through making them members of the family firm’s SSAS once they are legitimately working there. A SSAS could act as a tax efficient vehicle for cascading wealth through to the next generation, particularly where a family business is in the mix and binding the next generation into that business is part of the succession plan.
5. SSAS Restrictions
Despite George Osborne’s pension freedoms-led reforms, assets and savings held in pensions cannot be released to scheme members until they are aged 55. When they do begin decumulating they are subject to the increasingly controversial money purchase annual allowance which limits the tax-free amount they can contribute to just £4,000 per year.
This encourages a clean break into retirement in an era where many people prefer to move into retirement by stages, perhaps working part-time as non-executive chairman of the family firm, ideally topping up pension contributions, deep into their 70s.
That said, SSASs do benefit from being able to offer ‘loanbacks’ to purchase machinery and office equipment. However, these loans must not be recycled to provide retirement income, benefit a specific member financially or prop up the business’ operating expenditure when the order book is light.
6. Inheritance tax benefits
Pensions protect inheritance monies in more ways than one. Grandpa could decide to keep the bulk of his SSAS share intact, perhaps only withdrawing his 25% tax-free cash amount and leaving the rest of his share rolling up gross of tax. If he dies before the age of 75, his share can be redistributed without a tax charge to nominated beneficiaries, who may be the other SSAS members. If he dies after the age of 75 then the resulting inheritance due to those beneficiaries is subject to tax only at the marginal rate. In this respect SSASs are again no different from other defined contribution (DC) plans.
7. Bankruptcy protection
Money held inside a SSAS and all other ‘approved pension schemes’ registered with HMRC are protected against bankruptcy proceedings in most cases. One key piece of legislation here is the Welfare Reform and Pensions Act 1999. This Act provided a statutory footing for carving out pensions and putting them beyond the reach of creditors on bankruptcy.
However, more recent case law has muddied the position somewhat so that the only certainty is that pensions are broadly protected. Pension funds cannot be claimed outright on behalf of creditors by the Trustee in Bankruptcy (normally the Official Receiver) in cases of bankruptcy. Importantly, a debtor over age 55 cannot be compelled to crystalise his or her pension to pay debts.
8. Sustainable Retirement Income
Like other DC pensions, SSASs offer a route to sustainable retirement income. New options are opening up which give money purchase pension scheme members an opportunity to split pension savings between guaranteed income (delivered by purchasing an annuity) and a drawdown policy which can provide additional retirement income. Like bacon and eggs, the combination of the two is much better than one or other alone.
The drawdown account provides for lifestyle events i.e. that extra holiday, school fees for the grandchildren, wedding expenses for a daughter or the building of the long-planned extension to your home.
However, if all funds are held outside the pension, it’s not possible to buy an annuity at all so it becomes more onerous to manage your money in retirement. The growing threat of running out of money in retirement looms larger.
9. Multi-generational dynamic demands asset mix
As Grandpa begins preparing for retirement, he will need to plan how to take his share of the SSAS without needing to borrow against illiquid assets in it for example.
So, naturally, this creates a need for a mix of liquid assets which can be decumulated to buy that annuity for example. While the next generation is simultaneously being encouraged to invest in the business, supported by SSAS-held illiquid assets.
Where in many cases the younger generation are under-saving for retirement today, SSAS membership is quietly ensuring retirement savings are rising with commercial property valuation increases (in good times) and through the success of the business as a whole. Remember SSAS members can deposit rent for the commercial offices owned by the trustees of the SSAS, straight into the SSAS. In this way, liquid savings are directly supported by the illiquid asset.
There is a clear need for careful balancing of the mix of assets, reducing exposure to riskier assets as Grandpa ages. Planning ahead is so important when illiquid assets are involved. Again, an IFA can ride to the rescue here by dynamically adjusting the SSAS’s investment portfolio and mapping out SSAS members’ ‘exit and decumulation’ plans.
10. Divorce is messier where property is concerned
Perhaps if divorce is looming, SSASs are not the best place to be, especially if a commercial building is the key asset in the scheme.
Clearly, it’s conceivable that members may have to sell their commercial property in cases where a key director is divorcing his or her spouse under the Pension Sharing Order.
It will be critical to seek finance advice in these instances. There are now specialists in this area and the Pension Advisory Group has produced a seminal 176-page ‘Guide to the Treatment of Pensions in Divorce – July 2019′, underlining how important it is to work with an IFA with experience in this area.
Future-proofing adviser relationships
In summary, there is no doubt that SSASs offer distinct advantages, particularly for those running family businesses which are likely to be able to offer future generations a long career and, eventually, a solid retirement income. Arguably, with the nature of work changing so rapidly today, the traditional family business which is passed from father to sons or daughter is increasingly rare.
However, we should not underestimate the power of aligning the generations from the point of view of stimulating investment in property, encouraging long term saving from a young age and softening the blow of saving by sharing this burden across several members.
To some extent, SSASs offer to take the sting out of the major issue of passing wealth in a timely way to the next generation so that it reaches them at a time when it can reasonably support their lifestyle and give them more choices about how they support their own children.
This concentration of wealth into the hands of Baby Boomers and the Silent Generation tends only to build up resentments and fosters the feeling that we may not be in it together after all. By contrast, SSASs engender that intergenerational mutual trust – creating a framework for passing wealth seamlessly and tax efficiently to the next generation, as they take on more of the work of reinventing the business so that it’s fit to pass on to their children.
It’s also great for IFAs who otherwise may struggle to persuade the next generation to pay their fees for financial advice. If the next generation is already a member of the family business’ SSAS, the family’s IFA will naturally segway into advising the next generation’s family.
Of course, the lifetime value of a typical IFA’s client is a key measure for valuing their business. If they can increase the typical longevity of each client from 10 to say 25 years (across two generations) this will do wonders for their own exit and retirement plans too.
Adrian Boulding is director of retirement strategy at Dunstan Thomas