Caitlin Southall is director of SSAS transformation and proposition at WBR Group
Caitlin Southall explores the usage of DB SSAS in her latest article for Professional Adviser
It's estimated that there are around 50,000 small self-administered schemes (SSAS) in the UK pension market. Mostly used for owner-managed businesses as a tax-efficient way to save for retirement, the absence of Financial Conduct Authority (FCA) oversight means that the SSAS services market is more fragmented than its more popular cousin, the self-invested personal pension (SIPP).
SSASs still have a huge part to play in retirement and business planning for the right client. Most SSASs operate on a defined contribution (DC) basis, as a money purchase scheme. However, there are a very small number of professional trustees in the market who offer a defined benefit (DB) SSAS.
While most rules that govern the schemes are the same (think death benefits, regulatory requirements and good trusteeship), there is a notable difference when it comes to contribution levels.
A DB SSAS mirrors a number of the features of a DC scheme, in that you're able to have up to 11 members, loan backs and borrowing are available, subject to HM Revenue & Customs (HMRC) rules, and the huge range of investment options are also available.
A DB SSAS operates using the regulatory framework that applies to traditional DB pension arrangements. Within this structure, an actuary is required to assess the member's circumstances and calculate an appropriate and permissible target pension, from which an agreed level of employer contribution is determined.
As with many features of a SSAS, the benefit is not just felt by the pension saver, but the sponsoring employer too. Subject to the usual ‘wholly and exclusively' criteria, these contributions will typically qualify as an allowable deduction for corporation tax purposes in the hands of the sponsoring employer. Taking into account the current corporation tax rate of 25%, the ability to secure significant, fully deductible contributions make contributing to a SSAS an increasingly attractive planning option for clients.
DB SSAS subject to DB rules
Importantly, as a DB SSAS is subject to DB rules, restrictions such as the Money Purchase Annual Allowance (MPAA) won't apply. This might be particularly attractive for clients who have, or intend to, exit the workforce and access some of their pension before going back to work full or part-time.
Another unique feature of a DB SSAS is the treatment of investment performance relative to actuarial funding assumptions. Where scheme assets grow at a rate exceeding the actuarial basis, the resulting actuarial surplus may be allocated by the trustees to support the payment of benefits for additional scheme members.
In my experience, this feature is commonly used to pay investment gains to the children or grandchildren of the company directors (who also need to be scheme members who are associated with the participating employer). From an intergenerational perspective, this will be attractive to limit tax exposure, especially noting the changes to inheritance tax and pensions coming into force in April next year.
Any DB SSAS will go through regular scheme reviews, much like any other type of DB scheme. It's a vital part of good scheme governance to make sure that there's sufficient funding to pay the required pension. If a periodic actuarial review discovers a funding shortfall, there is currently no statutory requirement for the sponsoring employer to make deficit‑repair contributions.
There are some horror stories relating to under-funded DB schemes that could act as a deterrent, however, in the case of DB SSASs, this should not present a risk for the sponsoring employer.
Similarly, to DC schemes, a DB SSAS also offers the opportunity to use carry forward, albeit this process would involve actuarial calculations to ascertain the amount of carry forward that could be used. This allows members to catch up on historic under‑funding or low contributions by applying the same target‑pension methodology used at scheme establishment. Evidently, this can facilitate the accumulation of materially larger pension funds over a shorter timeframe when compared with standard money purchase arrangements.
This can be particularly interesting to those that may have left their pension funding or planning until later in the day than would be ideal.
Additionally, DB SSAS structure provides a highly efficient mechanism for accelerated funding where a specific investment objective is expedited, such as the acquisition of commercial property.
The need for actuarial input inevitably results in additional cost and complexity. However, these considerations are often outweighed by the ability to deliver accelerated funding, alternative intergenerational planning solutions or to contribute where the otherwise restrictive MPAA would apply in a DC environment.
Caitlin Southall is director of SSAS transformation and proposition at WBR Group
