While the SSAS market has been overshadowed by SIPPs in recent years, there are many reasons why they should be considered as a pension option, says Robert Graves
There are many excellent advisers who understand the benefits of a small self-administered scheme (SSAS), but I fear there could be many more who are missing an opportunity by ignoring the SSAS option.
SSASs may have fallen off advisers’ radars in recent years due to the rapid expansion of the self-invested personal pensions (SIPP) market post A-Day.
Perhaps the assumption was that SIPP would make SSASs redundant. Certainly, a number of life assurance companies withdrew from the SSAS market perpetuating that assumption.
The reality is SSASs are very much alive. Admittedly, they are not as vibrant as the ubiquitous SIPP but all the same SSASs do have different features that may make them appropriate for certain clients.
How does a SSAS compare with a SIPP?
A SSAS is a type of occupational pension scheme, typically set up for small limited
companies and allows up to a maximum of eleven members.
A key aspect of the SSAS is the level of control it gives to the business as the SSAS members and the business owners tend to be one and the same. They appreciate being able to run their own pension scheme and deciding on which investments the scheme can make. This differs to many SIPPs, which are largely controlled by the product provider.
The SSAS has control advantages over a SIPP in five key areas:
• Contributions can only be paid into a SIPP on a defined contribution basis and therefore are directly affected by the annual allowance which includes the current special annual allowance for high earners. The forthcoming reduction in the annual allowance from £255,000 to £50,000 will further limit contributions. A SSAS, while normally a defined contribution arrangement, can be set up as a defined benefit arrangement, and as such can accept contributions to achieve a targeted pension amount. The amount that can be actuarially justified can be more than three times higher than the amount that could be paid to a defined contribution scheme.
• Small businesses may face the dilemma of whether to keep profits within the business or make pension contributions. A SSAS can help with that dilemma. A SIPP cannot loan pension money to a company connected with the member, but a SSAS can. Up to 50% of the value of the SSAS can be lent to the sponsoring employer over a five-year period with interest being at least 1% above the average bank base rate. At a time when small businesses may find it difficult to borrow from banks this facility is a key advantage of a SSAS.
• Commercial property is a popular investment choice for small business owners, particularly given the advantages of holding the firm’s own commercial premises within a pension arrangement. Each director can hold a proportion of the property within their own individual SIPP but if a director leaves the firm and the remaining directors wish to ‘buy-out’ the share of the property the process can be complicated. For jointly owned assets it is often far easier to hold them in a common trust fund which is the way assets are held under a SSAS.
• Compared to each director of a firm having a SIPP charged on an individual basis, a SSAS, which will generally be charged on a group basis, can be more cost effective. Depending on circumstances, a three-person SSAS is usually more cost-efficient than three separate bespoke SIPPs.
While SIPPs can cater for a wide variety of needs, it is important for advisers working with clients, in the small business sector, to consider the SSAS option. It is a specialist area of pension planning but does offer solutions not otherwise available.
Robert Graves is head of technical services at Rowanmoor Pensions
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