Neil MacGillivray looks at the factors behind a recent increase in SSAS business
In the Technical Support Unit at James Hay Partnership, we are sometimes asked for guidance on the relative merits of SSAS and SIPP.
In the past six months or so we have seen a noticeable upturn in the number of enquiries regarding SSAS; mirrored by a corresponding increase in SSAS new business for the James Hay Partnership. The rationale behind the enquiry has either been the idea of using a loan back from the SSAS to the sponsoring employer, or the desire for the pension scheme to acquire the company's business premises.
Number of conditions
A loan to a sponsoring employer is allowable as long as it is for genuine investment reasons, and it has to be "prudent, secure and on a commercial basis". There are a number of conditions applicable in order for the loan to satisfy the legislation, and these include the maximum amount of loan from the scheme, the minimum interest rate payable, the term of the loan and the security.
It is this latter aspect where most companies struggle. The asset to be used must have a value equal to the loan and the interest payable over the term and the scheme must have a first charge over it. Unfortunately many banks have a floating charge across all the assets of a company, and therefore there is no means to use these assets as security.
It is possible to use other assets, such as personal assets of the directors, however, we have found many of them are uncomfortable with this option.
In reality, it is the purchase of property that has been the driver behind the 130% increase in our SSAS business in the first quarter of 2012, over the first quarter of 2011.
The structure of most SIPPs is to have only one trustee, namely the provider's trustee company, whom in conjunction with the scheme rules will determine what is acceptable or not for the member's pension arrangement. They often insist on particular solicitors, surveyors, and property managers, when a property is being purchased.
This restriction can be limiting for companies where they have built up close working relationships with particular professional contacts in the general course of their own business. In addition, with no control over the appointment of a valuation surveyor, they have little alternative but to accept any increase in their rents, despite in many cases, a fall in the commercial value of the property.
The directors of small businesses have traditionally used SSAS for retirement planning purposes. As individuals they are comfortable with running their own financial affairs and making their own decisions, and a SSAS appeals to them as they are member trustees of the scheme, along with an independent trustee appointed by the provider. This allows the directors some autonomy when it comes to making decisions regarding the scheme, particularly in the case of a property.
Many SSAS providers are comfortable leaving these decisions to the discretion of the member trustees. It is therefore possible for the member trustees to appoint their own solicitor to act on their behalf for the property purchase, appoint a surveyor and they themselves act as the property manager.
The additional level of control satisfies the directors' desire to continue to manage their affairs, though they need to be mindful of the fact that if they wish to carry out any work on the premises, other than basic maintenance, they would need to seek the approval of the independent trustee. This is for the simple reason that the property is an asset of the scheme and any work being carried out should be seen to be adding value to the asset, and by extension, the scheme.
The continual reporting of the demise of SSAS has been greatly exaggerated, and we firmly believe there is a place for them to sit alongside SIPP. The cessation of protected rights and the ability to now transfer those funds to a SSAS opens up opportunities to expand this market; allied with the extra flexibility afforded by a SSAS.
This makes it a valuable product in the toolkit for financial advisers, particularly for those focused on advising small businesses.
Neil MacGillivray is head of technical support at James Hay Partnership
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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