Wednesday, 15 May 2013 12:54
Technical Update: SSAS revival and comparisons with Sipps
By Andrew Roberts of Barnett Waddingham
SSAS revival as Sipps regulation causes some advisers to hesitate
While most financial planners are comfortable with Self Invested Personal Pensions (SIPPs), Small Self-Administered Schemes (SSAS) have largely been on the backburner when it comes to pension planning since 2006. This refresher on SSASs will hopefully be of interest to those having to look at all pension options for their clients. I also go under the bonnet of what it means to do SSAS administration.
It's worth remembering that a SSAS is a member-directed, (usually) money purchase, occupational trust-based pension scheme with fewer than 12 members where they all act as trustees and take investment decisions unanimously. It's easier just to say SSAS.
Due to the potential for SSASs to invest in a wide range of assets, including lending money to its sponsoring employer, SSASs are often used by business owners and company directors. For family run businesses they allow family members' pension policies to be invested together and to some extent invested to help support their business.
SSASs are established by a sponsoring employer, typically a limited company. Occupational schemes must adhere to certain standards including audited accounts and limits on self-investment (thanks to Robert Maxwell) but SSASs can be exempted from most of these requirements if all members act as trustees and decide on investment unanimously.
The trustees, and hence the members, are responsible for the day to day running of the scheme, giving the members a greater degree of control over their pension savings and flexibility on investments as would be available in, say, an insured arrangement.
Contribution rules follow the universal pension rules but it is worth commenting that as most members are connected to the sponsoring employer, contributions tend to be company contributions rather than net personal contributions. This saves National Insurance but also claiming tax relief on net personal contributions isn't very efficient for small schemes.
Investment opportunities are extensive and include cash, quoted stocks and shares, lending money to the schemes sponsoring employer, borrowing funds from a bank or financial institution and buying commercial property from its members. They are broadly similar to SIPP, other than the loan back facility. A SIPP however is operated by a pension provider who may impose additional restrictions on investment choice.
Benefit choices basically mirror those available in SIPPs – most use income drawdown or flexible drawdown and there is the option of annuity purchase. Death benefits are also under the same rules as for SIPPs, though there is potential for more control if it is your family members deciding on beneficiaries rather than a pension provider.
What is involved in the running of a SSAS?
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The day to day running of a SSAS involves many factors, but broadly it is tracking members funds, checking transactions adhere to pension rules and making reports to HM Revenue & Customs and other authorities. Good record keeping is vital as confirmed by the Pensions Regulator who recently issued Code of Practice 13 covering good standard of pension administration that they expect trustees to follow.
Some form of financial statements should be prepared for the scheme each year as part of good governance and to help with reporting requirements. Depending on the rules set out in the scheme's governing documentation, the financial statements can take the form of a simple balance sheet prepared by the trustees, formal accounts from an accountant or audited accounts.
The trustees will need to track each member's share of the scheme. As well as investment returns this will clearly be affected by contributions and pension transfers that have been paid into the scheme on each member's behalf and any benefits that have been paid to the member. It is good practice to document the allocation of the scheme assets periodically - at least annually and also as part of any trigger event such as benefit drawing.
{desktop}{/desktop}{mobile}{/mobile}
HM Revenue & Customs usually require SSASs to complete and submit a Registered Pension Scheme Return each year and this is the main report that is required. This return provides details of the scheme's investments, transactions and dealing with connected parties. This information can help determine whether a scheme should be subject to further scrutiny by HMRC, who will be checking that there are not unauthorised payments such as overpaid pensions, unsecured loans to connected parties or value shifting between the scheme and members.
Other returns may also be required as a result of certain trigger events, such as payment of some benefits. The trustees may also have to complete a Self-Assessment tax return to reclaim tax on investment income that was taxed before distributed.
Of course, the trustees are also responsible for paying benefits from the scheme to members and providing the members with necessary information such as lifetime allowance usage.
Who can run the SSAS?
Each SSAS must have a Scheme Administrator registered online who is responsible for providing information to HMRC and the members.
The Scheme Administrator is also liable for any penalties and taxes if the pension rules are not followed, so it is important that a person with the necessary knowledge and pension experience carries out this role. The Scheme Administrator can be one or more of the trustees or the trustees can appoint an independent professional trustee to act on their behalf.
{desktop}{/desktop}{mobile}{/mobile}
Given the complexities of pension legislation and requirements that need to be met, the majority of SSASs seem still to have a professional trustee to assist them with the running of their scheme. The professional trustee acts alongside the member trustees and would typically also carry out the day to day administration of the scheme and the reporting requirements.
What are the advantages of appointing a professional trustee?
Simply put, the professional trustee can block transactions – whether investments or benefit payments – that would breach rules and thus create tax penalties. I see cases where lay trustees thought they knew the rules but had misunderstood, misremembered or simply missed a rule change and so without a professional trustee to stop them had pressed ahead.
The member trustees do not have to appoint a professional trustee. We assist around 130 schemes where there is no professional trustee and have no qualms about trustees not wanting a professional to act as co-trustee with them. Acting as professional trustee is more responsibility and more liability.
I would counsel against completely abstaining from engaging professional guidance though. The tax charges applied due to misunderstanding pension rules are, to my mind, often disproportionate to the offence committed and there is little scope in the regulations to correct administrative oversights.
{desktop}{/desktop}{mobile}{/mobile}
What are the differences between a SIPP and a SSAS?
The legislation that governs SIPPs and SSASs is essentially the same and the benefits that accrue in each type of arrangement are similar. This is a consequence of pension simplification that tried to create one rule for all.
As we know, though, a SIPP can only be operated by a regulated firm and the impact of this was far more reaching than first anticipated. The indirect consequence of regulation has meant that many SIPP operators are now reducing the flexibility that they first allowed within their SIPP so as to satisfy the regulator that consumer protection is paramount in their business operation.
A key point, therefore, is that by being a standalone pension managed by member trustees, the members have more control over their pension savings than they do were they in a SIPP, tied to a provider. Ultimately, if the SSAS company providing trustee or professional assistance goes out of business, the member trustees can still access their funds with little delay. It is akin to your business remaining intact if your accountant goes out of business.
{desktop}{/desktop}{mobile}{/mobile}
There is one key difference in the investment rules. Subject to meeting certain requirements, SSASs can make loans to the sponsoring employer making funding available to the member's business. As SIPPs do not have a sponsoring employer, loans to any companies connected to the SIPP members are not allowed. This is often the driver for establishing a SSAS over a SIPP. Loanbacks are notoriously at risk though of incurring tax charges if not arranged correctly or if not repaid properly.
Whether a SIPP or SSAS would be better for a client would depend on their circumstances and their plans for their pension savings. From a cost point of view there may be some savings setting up a SIPP as opposed to a one member SSAS. Similarly, a SSAS set up for a number of the directors of a family business may more cost effective than setting up individual SIPPs for the members.
{desktop}{/desktop}{mobile}{/mobile}
Current issues affecting SSASs
In response to pension liberation concerns, it is now potentially harder to set up a new pension scheme at short notice. This means that those wanting to contribute in their financial year to a new SSAS should take action earlier than might previously have been thought.
It is perfectly proper for an established trading company to want to set up a small pension scheme to build up retirement benefits for directors in a manner which allows funds to be used to help grow that business. This is completely different from using an occupational pension scheme simply to access an unregulated investment. Our experience to date is that HMRC are approving new schemes for established schemes in a few days.
The Pensions Regulator has indicated that it will take a more active approach to small schemes during 2014. I hope that it will acknowledge the role that SSASs have to play for UK entrepreneurs and business owners. There is a regulatory gap in that one-member occupational schemes do not need to register with the Pensions Regulator and it seems inevitable that this gap will be closed.
In the meantime, the Code of Practice on the governance and administration of occupational defined contribution trust-based schemes, issued in November, sets out the Pensions Regulators expectations for good management of schemes and SSAS professionals should read the Code and consider how they can improve their service based the 31 highlighted quality features.
Andrew Roberts, Partner, Barnett Waddingham LLP
SSAS revival as Sipps regulation causes some advisers to hesitate
While most financial planners are comfortable with Self Invested Personal Pensions (SIPPs), Small Self-Administered Schemes (SSAS) have largely been on the backburner when it comes to pension planning since 2006. This refresher on SSASs will hopefully be of interest to those having to look at all pension options for their clients. I also go under the bonnet of what it means to do SSAS administration.
It's worth remembering that a SSAS is a member-directed, (usually) money purchase, occupational trust-based pension scheme with fewer than 12 members where they all act as trustees and take investment decisions unanimously. It's easier just to say SSAS.
Due to the potential for SSASs to invest in a wide range of assets, including lending money to its sponsoring employer, SSASs are often used by business owners and company directors. For family run businesses they allow family members' pension policies to be invested together and to some extent invested to help support their business.
SSASs are established by a sponsoring employer, typically a limited company. Occupational schemes must adhere to certain standards including audited accounts and limits on self-investment (thanks to Robert Maxwell) but SSASs can be exempted from most of these requirements if all members act as trustees and decide on investment unanimously.
The trustees, and hence the members, are responsible for the day to day running of the scheme, giving the members a greater degree of control over their pension savings and flexibility on investments as would be available in, say, an insured arrangement.
Contribution rules follow the universal pension rules but it is worth commenting that as most members are connected to the sponsoring employer, contributions tend to be company contributions rather than net personal contributions. This saves National Insurance but also claiming tax relief on net personal contributions isn't very efficient for small schemes.
Investment opportunities are extensive and include cash, quoted stocks and shares, lending money to the schemes sponsoring employer, borrowing funds from a bank or financial institution and buying commercial property from its members. They are broadly similar to SIPP, other than the loan back facility. A SIPP however is operated by a pension provider who may impose additional restrictions on investment choice.
Benefit choices basically mirror those available in SIPPs – most use income drawdown or flexible drawdown and there is the option of annuity purchase. Death benefits are also under the same rules as for SIPPs, though there is potential for more control if it is your family members deciding on beneficiaries rather than a pension provider.
What is involved in the running of a SSAS?
{desktop}{/desktop}{mobile}{/mobile}
The day to day running of a SSAS involves many factors, but broadly it is tracking members funds, checking transactions adhere to pension rules and making reports to HM Revenue & Customs and other authorities. Good record keeping is vital as confirmed by the Pensions Regulator who recently issued Code of Practice 13 covering good standard of pension administration that they expect trustees to follow.
Some form of financial statements should be prepared for the scheme each year as part of good governance and to help with reporting requirements. Depending on the rules set out in the scheme's governing documentation, the financial statements can take the form of a simple balance sheet prepared by the trustees, formal accounts from an accountant or audited accounts.
The trustees will need to track each member's share of the scheme. As well as investment returns this will clearly be affected by contributions and pension transfers that have been paid into the scheme on each member's behalf and any benefits that have been paid to the member. It is good practice to document the allocation of the scheme assets periodically - at least annually and also as part of any trigger event such as benefit drawing.
{desktop}{/desktop}{mobile}{/mobile}
HM Revenue & Customs usually require SSASs to complete and submit a Registered Pension Scheme Return each year and this is the main report that is required. This return provides details of the scheme's investments, transactions and dealing with connected parties. This information can help determine whether a scheme should be subject to further scrutiny by HMRC, who will be checking that there are not unauthorised payments such as overpaid pensions, unsecured loans to connected parties or value shifting between the scheme and members.
Other returns may also be required as a result of certain trigger events, such as payment of some benefits. The trustees may also have to complete a Self-Assessment tax return to reclaim tax on investment income that was taxed before distributed.
Of course, the trustees are also responsible for paying benefits from the scheme to members and providing the members with necessary information such as lifetime allowance usage.
Who can run the SSAS?
Each SSAS must have a Scheme Administrator registered online who is responsible for providing information to HMRC and the members.
The Scheme Administrator is also liable for any penalties and taxes if the pension rules are not followed, so it is important that a person with the necessary knowledge and pension experience carries out this role. The Scheme Administrator can be one or more of the trustees or the trustees can appoint an independent professional trustee to act on their behalf.
{desktop}{/desktop}{mobile}{/mobile}
Given the complexities of pension legislation and requirements that need to be met, the majority of SSASs seem still to have a professional trustee to assist them with the running of their scheme. The professional trustee acts alongside the member trustees and would typically also carry out the day to day administration of the scheme and the reporting requirements.
What are the advantages of appointing a professional trustee?
Simply put, the professional trustee can block transactions – whether investments or benefit payments – that would breach rules and thus create tax penalties. I see cases where lay trustees thought they knew the rules but had misunderstood, misremembered or simply missed a rule change and so without a professional trustee to stop them had pressed ahead.
The member trustees do not have to appoint a professional trustee. We assist around 130 schemes where there is no professional trustee and have no qualms about trustees not wanting a professional to act as co-trustee with them. Acting as professional trustee is more responsibility and more liability.
I would counsel against completely abstaining from engaging professional guidance though. The tax charges applied due to misunderstanding pension rules are, to my mind, often disproportionate to the offence committed and there is little scope in the regulations to correct administrative oversights.
{desktop}{/desktop}{mobile}{/mobile}
What are the differences between a SIPP and a SSAS?
The legislation that governs SIPPs and SSASs is essentially the same and the benefits that accrue in each type of arrangement are similar. This is a consequence of pension simplification that tried to create one rule for all.
As we know, though, a SIPP can only be operated by a regulated firm and the impact of this was far more reaching than first anticipated. The indirect consequence of regulation has meant that many SIPP operators are now reducing the flexibility that they first allowed within their SIPP so as to satisfy the regulator that consumer protection is paramount in their business operation.
A key point, therefore, is that by being a standalone pension managed by member trustees, the members have more control over their pension savings than they do were they in a SIPP, tied to a provider. Ultimately, if the SSAS company providing trustee or professional assistance goes out of business, the member trustees can still access their funds with little delay. It is akin to your business remaining intact if your accountant goes out of business.
{desktop}{/desktop}{mobile}{/mobile}
There is one key difference in the investment rules. Subject to meeting certain requirements, SSASs can make loans to the sponsoring employer making funding available to the member's business. As SIPPs do not have a sponsoring employer, loans to any companies connected to the SIPP members are not allowed. This is often the driver for establishing a SSAS over a SIPP. Loanbacks are notoriously at risk though of incurring tax charges if not arranged correctly or if not repaid properly.
Whether a SIPP or SSAS would be better for a client would depend on their circumstances and their plans for their pension savings. From a cost point of view there may be some savings setting up a SIPP as opposed to a one member SSAS. Similarly, a SSAS set up for a number of the directors of a family business may more cost effective than setting up individual SIPPs for the members.
{desktop}{/desktop}{mobile}{/mobile}
Current issues affecting SSASs
In response to pension liberation concerns, it is now potentially harder to set up a new pension scheme at short notice. This means that those wanting to contribute in their financial year to a new SSAS should take action earlier than might previously have been thought.
It is perfectly proper for an established trading company to want to set up a small pension scheme to build up retirement benefits for directors in a manner which allows funds to be used to help grow that business. This is completely different from using an occupational pension scheme simply to access an unregulated investment. Our experience to date is that HMRC are approving new schemes for established schemes in a few days.
The Pensions Regulator has indicated that it will take a more active approach to small schemes during 2014. I hope that it will acknowledge the role that SSASs have to play for UK entrepreneurs and business owners. There is a regulatory gap in that one-member occupational schemes do not need to register with the Pensions Regulator and it seems inevitable that this gap will be closed.
In the meantime, the Code of Practice on the governance and administration of occupational defined contribution trust-based schemes, issued in November, sets out the Pensions Regulators expectations for good management of schemes and SSAS professionals should read the Code and consider how they can improve their service based the 31 highlighted quality features.
Andrew Roberts, Partner, Barnett Waddingham LLP
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