Mark Pipe looks at why a SSAS can be the best pension choice for business owners.
Entrepreneurship appeals to people with a vision for their business and desire to control the investment of their hard-earned assets. This desire is no better shown than when they arrange their pensions.
Financial advisers know this, which is why a small self-administered scheme (SSAS) is often the preferred pension vehicle of choice for business owners.
A SSAS offers unrivalled options in terms of its membership, the assets it holds and the possibility to keep assets in the family with reduced exposure to inheritance tax.
It is set up by the entrepreneur's company. This is usually a limited company but, with extra care, other types of employer, such as a partnership, can set up aSSAS.
The company determines who joins the scheme. This is usually limited to key decision makers at the company or family employees in order to retain control of the assets, and also because all members are generally appointed as trustees. A professional trustee and scheme administrator usually helps take care of the technicalities of administering the scheme.
The company will generally make contributions to the scheme in respect of the members. Contributions which are deemed reasonable by the local inspector of taxes will attract corporation tax relief – in fact, this often drives the establishment of a SSAS.
Membership of a SSAS is not limited to company employees. Anyone who is invited by the company or the trustees can join, including family members who do not work for the company.
This additional flexibility is attractive if a number of individuals have existing pension policies which they wish to consolidate, perhaps to make an investment with other scheme members.
The SSAS working with the company
Probably the most popular SSAS investment is the purchase of commercial property which is then let to the company. This can be bought from the company or from an unconnected vendor. Why would the SSAS and company want to do this?
1. If the property is bought from the company, it will benefit from an injection of cash to help it expand
2. The asset is beyond the reach of company creditors should the company be liquidated
3. The rent is a legitimate corporation tax expense and is not taxed in the SSAS
4. The property can be re-let or redeveloped if the sponsoring company needs to move on.
The SSAS and the company must always deal on an arm's length commercial basis. Paying more or less than the market rate leads to punitive tax charges.
For this reason, before the property is acquired from the sponsoring company, the SSAS trustees should commission a valuation from a surveyor to evidence both the purchase price and rent.
If the property is VAT registered, it is likely that the SSAS will also wish to become VAT registered. This enables the SSAS to reclaim the VAT on the purchase price, but it will then have to charge VAT on the rent.
Moving assets down a generation or two
A SSAS no longer has to secure benefits by buying an annuity when a member attains age 75. This has opened up the ability for assets to be retained in the SSAS far longer and provide the senior members with pensions from investment income.
Senior members often start with a higher proportion of the SSAS, but over time as pensions are paid and the company makes contributions, the balance moves in favour of the younger members.
The natural consequence is that the property remains in the SSAS but benefits the younger members rather than the senior members as time passes, without any inheritance tax.
Mark Pipe is a partner at Barnett Waddingham
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