Nathan Bridgeman highlights the important benefits that come from using a SSAS
With the huge rise in SIPP business over the last few years much has been written on the death of the SSAS. Far from being dead, however, the SSAS is not only alive and well but enjoying a renaissance. This is especially true for company directors, sole traders and business partners who, rather than paying corporation tax, would prefer to extract as much money as possible from their business for their own benefit.
As well as the business being able to make a contribution on behalf of the owners/senior staff, they have the added advantage of SSAS trustee/administration fees being paid by the business and so constituting a business expense. This will not only help to reduce National Insurance for the member and business but further help to reduce the corporation tax bill. In contrast, SIPP fees are usually paid by deduction of money from scheme assets (usually from the trustee bank account).
Now that the dust has settled on the Finance Act 09 and we have the new rules that effect contributions, it is clear we are going to have to get more creative in our planning. This is especially true for those that have £150,000 per annum of relevant income. Not only that, but with the Bank of England base rate at just 0.5% and rates of return so low on trustee bank accounts, it is worth looking at alternatives for extracting income from a business tax efficiently and enhancing the scheme member’s returns. One way of achieving this is for the pension scheme to loan the business money. In the post A-Day world loanbacks are very different. To summarise, loans from a SSAS can be:
- To a sponsoring employer or third party
- No more than 50% of net pension funds
- Security required is a first charge
- Maximum term is five years
- Capital and interest repayments – regular & equal instalments.
In practise this means that a business owner or employee can lend their pension funds to the business and set a return that is significantly higher than they could generate in a trustee bank account. Furthermore the repayment of the loan by the business would be a deductible business expense, reducing the companies’ corporation tax bill. The flipside of the coin is also interesting as it may be that the business owners want to secure low cost borrowing. If this is the case then the minimum interest rate currently repayable is only 1.5%!
This is one of the major advantages SSASs have over SIPPs, as a SIPP is only allowed to loan money to an unconnected party.
Benefits of a common trust/pooling assets
For three or more members SSASs usually work out as the lower cost vehicles. This is because the professional trustee is only administering one scheme rather than three or more individual SIPPs. For buying a common asset such as a property, this can not only work out cheaper but simpler for both the adviser, client and those providing professional services such as the solicitor.
In addition to the costs and simplicity advantage, having a common trust can also have advantages when one member wants to retire before other members of the scheme. For example in a SIPP, the members jointly owning a property as the underlying asset have earmarked funds. This means that if there is no liquidity in the scheme the property has to be sold in order to provide members with income/pension commencement lump sums. In a SSAS the older members can draw on the liquid assets of the scheme, such as rental income in this scenario, meaning the property does not have to be sold – which is particularly important if the property is the on-going company’s premises.
Unlike SIPPs, each SSAS is a separate trust. Scheme pension is therefore easier to administer. This means clients can achieve a potentially higher income than they could from income drawdown or annuity purchase. This option becomes very important at age 75 when the tax charge increases from 35% to 82% on any residual funds left. Unlike ASP, which is commonly available through SIPPs, scheme pension can offer a 10-year guarantee and also does not need to be reviewed annually. This strategy is very important when a client is trying to reduce their tax liability on death.
Although not the right vehicle for every business owner, as clients will lack pension fund privacy, SSASs are far from dead and given the benefits are well worth considering, particularly for family or like-minded business owners.
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