It was originally the Finance Act of 1973 that gave birth to the concept of the Small Self-Administered Scheme (SSAS). The first SSASs were subsequently written in 1976, and since then they have enjoyed a rich and successful history, helping empower individuals to take control of their retirement savings and investment decisions. In fact, it could be argued that the more widely known Self Invested Personal Pension (SIPP) owes its existence to the SSAS, Nigel Lawson introducing it as he did in 1989, effectively extending the freedoms to control and invest for individuals who were ineligible for a SSAS.
Following three years of experience with those early SSAS applications in the late ‘70s, the Joint Office of the Inland Revenue Superannuation Funds Office and the Occupational Pensions Board released Memorandum No 58, which acted as the first real source of guidance for SSASs in four key areas:
– It clarified the prohibition of loans to members of the scheme
– It made clear the necessity for “commercial arm’s length arrangements” between the scheme and any connected employer
– It permitted the deferral of the purchase of an annuity for a period of five years following a member’s retirement
– It reinforced the requirement of the appointment of a “pensioneer trustee”, whose primary role was to prevent the inappropriate wind up of the scheme
Unlike today, other restrictions on scheme investment at that time were quite relaxed. It was not until the Retirement Benefits Schemes (Restriction on Discretion to Approve) (SSAS) Regulations 1991 that the likes of residential property and personal chattels (such as works of art and classic cars etc.) were prevented, with grandfathering rules for schemes that already held these assets. Rules were also tightened around lending to connected employers, and whilst these functioned as guidelines, the schemes still operated under the discretionary powers of the Inland Revenue. This allowed a common-sense approach to be negotiated on investments which sat in grey areas and I can recall face-to-face meetings with the Revenue’s representatives at Thames Ditton, arguing the case for continued approval of a scheme which had sailed close to the wind!
Unfortunately, in 2006 the arrival of “A Day” changed everything. HMRC rescinded their discretionary approach and implemented the Registered Scheme approach instead, which remains in place to this day. A-Day quashed the very-welcome reintroduction of permitted residential property and the requirement for a pensioneer trustee. In my opinion, the latter has led to some of the problems experienced with SSASs over the last 10 years, and the necessitation of a “fit and proper” Scheme Administrator from 2014 was insufficient to prevent the Pensions Regulator’s executive director Andrew Warwick-Thompson, labelling SSASs “the vehicle of choice for criminals setting up a scam”.
Thankfully, the door has been closed on scammers since 2021, after the tightening of HMRC’s “check and register” process and The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 made the registration of and transfer of pension assets to a SSAS appropriate only for those genuinely requiring the vehicle.
In fact, the popularity of the SSAS has increased in recent times following the regulatory clampdown on SIPPs where some providers have been forced to reconsider and, in some instances, restrict their propositions. After all, SSASs are individually registered pension schemes governed by their own trustees, and they can, with advice from external professionals, decide exactly what investments they choose to hold and in what proportions. On the other hand, a member of a SIPP must abide by the specific rules of the Provider, whose product it is, and it is this flexibility that means a SSAS offer a clear advantage over a SIPP or group of SIPPs in many circumstances.
A big advantage that a SSAS enjoys over a SIPP is that it can lend funds back to its sponsoring or connected employer. A loan back is appealing for several reasons; mainly because it allows the interest on the lending to be paid directly into the SSAS as a tax-deductible expense of the business, rather than to a 3rd party lender. An attractive proposition given the SSAS is just another pocket of the directors’/members’ own wealth.
Can I borrow from my pension plan?
A loan back is, of course, conditional on the following five key criteria being met. Should any of these not be the case, loan payments to the employer would incur tax charges as an unauthorised employer payment:
1. The loan must not exceed 50% of the net value of the SSAS assets
2. The term of the loan must not exceed five years
3. The interest rate (currently) must be a minimum of 1% above the bank base rate to be considered commercial
4. The loan should be repaid with equal capital and interest repayments over its term
5. The loan should be secured with a first charge over a suitable asset for the term of the loan
Furthermore, the loan must also be appropriately documented and the “arm’s length” nature of the terms of the loan must be adhered to, otherwise once again this could lead to unauthorised payment tax charges.
The security offered against the loan can also bring with it pitfalls. Firstly, the charge must be registered. Failure to do so could make it unenforceable, which would invalidate one of the five criteria. Secondly, in such a case where there is a default of the loan, the trustees should call in their security, meaning that they would at that time hold a financial interest in the security offered. If that security is a commercial property for example, there would be no issue as a commercial property could legitimately be held in a SSAS in any event. However, other assets such as residential property, plant and machinery could trigger tax charges as holding those assets directly incurs tax charges both within and outside of the scheme.
Often, a suggested method of security is a fixed and floating debenture over the company’s assets. It may meet the criteria of a loan at the point of the advance, but if the company is later placed into administration, such an asset would fail to meet the criteria of a first charge since certain creditors of the company take precedence over a debenture charge.
Another of the main benefits of a SSAS pension is commercial property purchase. In fact, the majority of SSASs own the property from which the business trades.
Compared to a SIPP, the key advantages here are simplicity and cost. A SSAS property purchase works as multiple members acquire the property within a single trust, simplifying the legal ownership, whereas acquisition through multiple SIPPs can be more costly.
As already mentioned, the paying of tax-deductible rent directly into the SSAS as opposed to a third-party landlord is attractive, as of course is having a “friendly landlord”. However, company directors, often also trustees and scheme members, must remember their appropriate responsibilities as SSAS trustees in ensuring that the acquisition or disposal of a property to or from the company must be conducted on evidenced commercial terms. Similarly, any subsequent leaseback of a property should also be documented by a lease or tenancy agreement, and on appropriate “arm’s length” terms.
To help in the purchase of a property, a SSAS can borrow from connected or third-party lenders. The maximum borrowing is limited to 50% of the net value of the scheme immediately before the borrowing, and if from a connected source the same commercial terms must be applicable.
In conjunction with other parties, a SSAS can also hold part of a property. They allow joint ownership, and they can also phase the purchase or disposal of a property where it may be efficient to do so.
Other than the grandfathering mentioned earlier, there are extremely limited circumstances where residential property can be held in a SSAS. These relate solely to where it is necessary for an unconnected employee to occupy residential premises connected to the commercial premises as a condition of their employment. An example might be where a public house has a manager’s flat attached to it.
One of the final SSAS advantages is the seamless cascading down of wealth through generations.
Again, the single trust concept helps here. On death of a member, their entitlement within the scheme can be left to chosen beneficiaries who themselves can become beneficiary members of the trust. Assets, particularly those of an illiquid nature such as property, can continue to be held indefinitely with the income generated by them paid out to beneficiaries as they require it.
Where multiple beneficiaries have been nominated, a proportion of the assets can be notionally allocated to them without the need to create a separate individual arrangement into which a specific proportion of the property would need to be transferred.
The single trust method also allows the flexible reallocation of the notional share of the asset between beneficiaries/members, in exchange for other assets within the common trust fund.
Finally, in the event of the any funds remaining on the death of a beneficiary member, those assets can be cascaded down to the next generation, also within the single trust.
To conclude, in the battle of SSAS vs SSIP, SSASs continue to offer an alternative and often advantageous route over SIPPs, particularly to family owned, owner managed and small/medium enterprise businesses where individuals wish to have greater control over and more flexibility to use their retirement funds.