As advisers increasingly turn to SSASs for solutions, Dentons' Derrick Fowler examines their rise back to favour.
With the Retail Distribution Review focusing the business models of advisers, and auto-enrolment potentially removing previous advice opportunities, alternative revenue generating options are required.
One that appears to be growing is corporate advice and tax planning, which can, of course, involve pension planning for directors and senior executives.
For these individuals, both small self-administered schemes (SSAS) and self-invested personal pensions (SIPPs) can offer a very wide range of investment opportunities. Increasingly, we are seeing advisers turning to the once forgotten SSAS for solutions.
SSASs have several distinct advantages over SIPPs, which include the following:
• Loan backs to the founder or associated employer
• Employers share purchase
• Administration fees can be paid by the employer as it is a corporate scheme
• Permitted life assurance within the scheme
• Collective pooling of funds
• Potential earmarking of assets with member/trustee agreement.
It is not just through loan backs that pension scheme monies can be used to assist company growth through finance.
Pension schemes can be used to acquire company assets, which are then leased back to the company, securing investment yield for the scheme while releasing capital back to the company. Such assets might include commercial property as the case study below shows.
Case study Joss Harwood at Eldon Financial
A profitable company owns the commercial property from which they trade. It is valued at £400,000 with an outstanding mortgage of £180,000. The bank has recently revised the terms and raised the interest on the mortgage.
While the company obtains corporation tax relief on the interest payments as a business expense, repayment of capital of the mortgage comes from post-tax profits. The two directors’ intentions are to repay the mortgage debt and remove the liability from the company’s books and they have earmarked £100,000 from company profits this year towards this.
They also have an old executive pension of which they are both members, each with a value of £55,000. When discussing this with their financial adviser, he suggests that the existing pension can be used along with a new pension contribution to achieve their objective.
He, therefore, recommends the conversion of the executive scheme to a SSAS. The existing value of £110,000 is augmented by a corporate contribution of £50,000 for each director, giving the SSAS a total value of £210,000.
The SSAS then purchases one half of the property from the company for £200,000, releasing the cash to the company, which it uses to extinguish the mortgage debt, and the remainder is used within the business as cash flow.
The primary objective has been achieved, in that the company has received tax relief on the pension contribution, effectively used to repay its mortgage debt. In addition, the following benefits have been obtained:
• The company pays rent to the pension scheme on the half of the property owned by the SSAS, which is received and growing free of tax
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m