Martin Tilley

Martin Tilley
Chief Operating Officer

More and more retirement planning strategies put in place for owner-managed businesses now include a Small Self-Administered Scheme (SSAS) due to the value they provide.

There are many advantages to a SSAS multi-member occupational scheme, as it allows for members’ individual entitlements to be pooled into a single fund. Thus, providing opportunity for the group to invest in assets which individuals may not have had access to, and even for large assets like commercial property to be obtained.

How does a SSAS operate?

This type of investment pooling is part and parcel of much like a common trust fund, which is the underlying structure of a SSAS – all members partake equally in the return of assets, in proportion to their interest, or share of the fund. This makes it fairly simple to record an individual’s entitlement through an annual statement.

The system does however rely on all members following a common investment strategy – which depending on the age of members and their attitude to risk, may make the retirement planning with a common trust fund approach seem less than appealing.

But all is not lost, for those not as keen on this ‘all for one’ approach, earmarking of assets can be a helpful workaround.

What are the benefits of earmarking?

Imagine, for example, a commercial property split 50:50 between two members of a SSAS. the rental income distributed equally between the two parties.

When outlining their retirement planning strategy, one might wish to invest their share in an aggressively managed equity portfolio. The other might want to try a less risky approach. Both are acceptable options. In this case, two separate ‘earmarked’ portfolios can be created, each with an investment strategy to suit their requirements.

In the days of the Lifetime Allowance (LTA), earmarking also allowed individuals who may be approaching their limit to choose a more stable, lower yielding asset, thus avoiding any potential tax on their fund share, while younger members whose pension entitlement has more room to grow can earmark the higher-returning assets. If the LTA is ever reinstated this benefit will again be relevant.

And what should you watch out for?

Whilst the earmarking of assets has many positive benefits, there are some points that should be taken into account before putting this approach into place.

– It is vital that earmarking of assets is appropriately documented and signed off by all members/trustees. This will help to reduce the likelihood of future misunderstandings or disputes.
– Earmarking should only be effective from the date of the signed resolution. ‘Back-dating’ could result in tax charges.
– While it is possible to cancel the earmarking of assets, this would require the agreement of all members/trustees, and again, be documented appropriately to avoid future confusion.
– Once a scheme moves away from the common trust fund approach, calculation of members entitlements moves beyond the skill of SSAS administration tools and requires manual calculation, which in turn incurs a small annual cost.

For experienced advisors and SSAS practitioners, earmarking can be an incredibly helpful tool in financial planning for business owners, allowing individuals within a multi-member scheme to still have some control over their assets. But it’s important that the implications are always explained, understood and managed.