Stephen McPhillips explores how to best structure income from a SSAS in his latest RP case study
Sally and Michael have been members and trustees of their limited company’s small self-administered scheme (SSAS) for many years.
During those years, the SSAS trustees have made a wide range of investments, including a loan to the sponsoring employer, commercial properties (leased to their business on commercial terms) and a portfolio of collectives managed by their adviser, Peter.
It’s fair to say that the SSAS has served them, and their business, very well over the years and it has grown in value through sound investment returns and healthy funding from the sponsoring employer.
The time has come for Sally and Michael to take a step back from the business and they have successfully organised a management buyout (MBO) by their very capable in-house team. Both commercial properties owned by the SSAS will continue to be occupied by the business because the properties are highly suited to the operational needs of the company.
This had been a long-term strategy for the SSAS and Peter’s advice had been invaluable in structuring investments in this way. Peter had also ensured that the SSAS loan to the employer had been repaid well in advance of the MBO and that the power of appointment and removal of trustees to the SSAS was vested in the trustees (rather than in the principal employer) prior to completion of the buyout.
Income needs from the SSAS
With these matters attended to, Sally and Michael now wish to reap the rewards of their long years of service and turn to Peter for advice on short, medium and long-term cash-flow planning for their income needs in retirement. They are conscious that a large proportion of their SSAS fund takes the form of bricks and mortar, which they appreciate is relatively illiquid in nature.
Peter meets with Sally and Michael to discuss their financial position now that the MBO has completed. He also updates them on the current value of their collectives portfolio, which has performed very well over the years, and which has provided diversification from their exposure to commercial property in the scheme.
Sally and Michael explain that they would like to take the maximum tax-free lump sums possible from the SSAS because they are keen to help their grandchildren with property purchases. They further explain that cash from the MBO will meet their short-term income needs and there is, therefore, no immediate need for retirement income payments from the SSAS.
The solution – short term
Peter confirms that, through careful financial planning, there is sufficient liquidity within the SSAS to enable maximum pension commencement lump sums (PCLS) to be paid to both Sally and Michael. This has arisen through recent rental income generated on the commercial properties, loan and interest repayments and recent employer contributions into the scheme. In addition to these cash-holdings in the SSAS bank account, Peter recommends that some of the collectives portfolio is disinvested to make-up the small shortfall in meeting the PCLS needs. Peter explains that selective sale of some of these collectives will result in profit-taking because the ones targeted have performed very well. Peter reminds Sally and Michael that the SSAS operates as a common trust fund, wherein the trustees can look to any asset to provide members with benefits.
The solution – medium to long term
Peter reminds Sally and Michael that the commercial properties will continue to generate cash rental income for the SSAS, which will be received tax-free into the SSAS bank account. Peter explains that, should it be required, some or all of this rental income can be paid-out to Sally and Michael as income payments under flexi-access drawdown. Peter also points out that the SSAS trustees can choose if / when to dispose of a commercial property if further cash is needed within the scheme, but that it could be held within the scheme indefinitely if desired.
Finally, Peter reminds Sally and Michael of the possibility of the properties being passed down through the generations on death to nominees/successors under the flexibilities offered by pension freedoms introduced in 2015. Sally and Michael are particularly pleased at this aspect of intergenerational tax-planning.
Stephen McPhillips is technical sales director at Dentons Pension Management
