The benefits of small self administered schemes are plain to see, even after A-Day and SIPP regulation says David Seaton
We know that following A-Day there are effectively two different types of pension scheme, occupational and non-occupational schemes. Non-occupational schemes include the recently regulated self-invested personal pensions (SIPP). SIPPs are deemed by some to be the only type of member-directed pension worth considering under the new regime. Indeed, most life assurance companies have left the small self-administered scheme (SSAS) market entirely.
Pension planning is a must for anyone running a profitable business. Profits left in a company are reduced by corporation tax and are at risk from business failure. Withdrawing profits as income or dividends incurs substantial tax charges and possibly National Insurance contributions, so investing the money in a pension, with all the tax advantages that brings, does seem to be the best answer, particularly when the members can control the funds in the pension scheme. The question for the adviser is, "Should this be done through a SSAS or through a SIPP?"
Having worked in the market for member-directed pensions since before the first SIPP was launched; I have seen the benefits of both and know that SIPPs have their limitations.
Pros and cons
Firstly, the underlying structure of the majority of SIPP schemes can create problems. A SIPP is established by a scheme operator, who is authorised and regulated by the Financial Services Authority. It is the operator who remains in control of the scheme and its Trust Deed and Rules. Should you wish to move to a SIPP provided by a different operator, all assets will need to be sold and repurchased; a messy and costly business.
The structure of a SSAS allows more flexibility and control. SSASs are established by an employer under a Trust Deed and Rules, so no scheme operator is involved. The employer has control and the ability to sack any professional trustee, scheme practitioner or scheme administrator appointed to the scheme. Therefore, if things go wrong, the professionals can be replaced and there is no need to dispose of scheme assets.
Secondly, in a SSAS the assets are held in the name of all of the scheme trustees. It is therefore the members, as trustees, who decide, in accordance with the Trust Deed and Rules and HMRC Guidance, what is an acceptable investment. A SIPP does not offer the same level of control. The SIPP operator will decide what it considers to be acceptable investments under the scheme.
The SIPP operator will also commonly be the sole scheme trustee, or will appoint an independent trustee to act on its behalf. The sole trustee owns all the assets of the scheme and SIPP investments can be restricted because of this. This is because the trustee faces the problem that as sole owner they have the sole liability for the asset. If the asset is a property, then that liability can be great.
For this reason, most SIPP operators will insist that the property is managed by a professional agent at the client's expense. If that property is the client's own business premises, they are quite right to consider this a complete waste of their money, particularly as they are capable of looking after the property themselves. Most entrepreneurs like the idea of moving their business premises into their pension scheme. However, they are not so sure about their property actually being under the sole control of a third party!
Another advantage of a SSAS is that the trustees have the ability to lend up to 50% of the fund to an employer connected to the scheme. This is still a very popular investment, despite the fact that loans from SSASs need to be secured on assets of adequate value. SIPPs have never been allowed to lend money to connected parties.
The SSAS provider will usually offer an individual service for the client to suit their particular circumstances. This could be to establish a scheme and adjust the input periods to enable the maximum contribution to be paid into the scheme, without giving rise to an annual allowance charge. It is also possible to establish a SSAS as a defined benefit scheme, which increases contributions benefiting from tax relief to a level well in excess of the annual allowance.
Death benefits may be insured by the trustees within the SSAS. The trustees established an insurance policy on the life of the member to enable a death benefit to be paid. Naturally, the premium comes out of the pension scheme so is tax-efficient, a valuable feature now that pension term assurance has been abolished.
Finally, and most compelling, is the fact that the SSAS is run on a common trust basis. This means that the funds are held in the arrangement for the benefit of all members and assets need not be earmarked for a particular individual. The primary advantage of this comes when a member reaches retirement. A company premises owned by the SSAS can, providing there are other assets in the scheme available to provide benefits for the retiring member, remain in the SSAS for the benefit of other scheme members. This is very attractive for family businesses. Trying to manage such an exercise via SIPPs is a complete nightmare as sale and purchase transactions between SIPPs have to take place and stamp duty is payable on each transaction. There are even additional potential VAT complications.
SIPPs are the preferred choice for pensions for a huge section of the community and will continue to be very successful. However, for the entrepreneurial business owner the SSAS must remain the pension arrangement of choice.
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