When considering pension provision for business owners, it is first necessary to determine whether either a small self-administered scheme (SSAS) or self-invested personal pension (Sipp) is required.
It should be remembered that both these retirement provision vehicles are subject to exactly the same criteria in respect of annual contribution allowances, tax exemptions on growth and benefits as conventional insured or platform based personal or occupational schemes.
While both Sipps and SSASs will provide considerably more investment flexibility, they do so most usually with additional costs and thus only where the greater flexibility of investment will be used are they suitable. There are a number of key questions that will help determine the most appropriate vehicle.
Is there an employer?
A SSAS is an occupational scheme created by an employer for directors, executives and key employees of the business and membership is at the discretion of the employer or trustees.
So for a sole trader or partnership, a SSAS would not be appropriate for the business owner as they would not be an employee for the purposes of legislation.
For them, a Sipp might therefore be the correct choice. The SSAS, however, being an occupational scheme gives it several advantages, which are expanded upon later.
Is ownership important?
A Sipp is a personal pension provided by a duly authorised and regulated product provider. In structure, it is most commonly a single scheme or trust where each individual member has a ring-fenced sub-trust. What is common is that a Sipp is integral to and thus governed by the specific requirements of the Sipp provider.
While the member may have power to request specific investments, the acceptance of them and administrative terms is in the control of the Sipp provider, which may be restrictive.
A SSAS, however, is a free standing trust and while there are many firms able to provide a professional trustee service, they are not compulsory and an employer may create such a trust using appropriate documentation adopting the rules required for a registered pension scheme. Either way, the scheme deed and rules will place control of the scheme most usually in the hands of the member trustees or employer. This ownership and control can be particularly important when it comes to determining how the scheme is operated, and if it becomes necessary to remove the professional trustee or administrator for example, they can be replaced with the trust remaining intact and simple re-registration of the assets being required.
This control extends into all investments including decisions as to where funds may be invested. For example, where a commercial property is to be purchased and owned, the decision of which solicitor, valuer, property manager and insurer should be used are all matters for the trustees – not the product provider. Likewise, who is selected as the default banker and the concentration of investments is under the trustees’ control.
Is self-investment required?
Much of the investment flexibility is common to both Sipps and SSASs, although the latter is permitted to lend to the founder employer. A Sipp may also lend as an investment, but only to parties with no connection to the member through family or business ties. The SSAS facility permits for up to 50 per cent of the net scheme assets to be lent back under a documented and ‘arm’s length’ basis. While conditions apply, limiting the maximum term of the loan and requiring commercial periodic repayments, the loan can be a useful source of company funding and due to the flexibility of interest rates, a good deal for the company, as the borrower, and the pension scheme, as an investment.
Another often-touted advantage is the ability for a SSAS to acquire shares in the founder or associated employer using a maximum of 5 per cent of the fund for each employer and a maximum of 20 per cent overall. However, taxable property rules introduced in 2006 mean that such an investment without incurring tax charges is only prudent in a very limited range of circumstances.
How many owners will participate?
The SSAS’s single trust route also permits pooling of assets for multiple members. It might be that four directors of a company all with £75,000 of pension assets could not individually reach the minimum level for investment with a certain discretionary fund manager, but collectively they could. Scheme allocation between members is also a simple arithmetical exercise where with Sipps, reallocation of assets between individual schemes requires the buying and selling and transfer of title between vehicles.
The SSAS common trust fund principle also permits the passing down of assets through a generation without sale. New cash contributions for younger members can be utilised to pay the benefits of the older members with a corresponding shift in the proportion of ownership of other longer-term assets such as property.
A SSAS will become more economic to administer the more members it has. It is quite often cheaper to run a SSAS with three or more members than the equivalent number of individual Sipps.
Who will pay the fees?
A Sipp provider will most usually deduct their administrative fees directly from the Sipp member fund. Thus the fee payment effectively depletes the member fund.
A SSAS, again being an occupational scheme, may have its administrative expense settled by the employer, who themselves should be able to treat the expense as a tax-deductable payment.
Regulation, complaints and compensation
Regulation may become a key feature in the selection of a suitable client product since the operation of both Sipps and SSASs are currently under review.
The marketing and operation of a Sipp is regulated by the FCA, which is currently conducting a third thematic review covering processes and operation of Sipp providers as well as the financial resources retained to facilitate an orderly wind up of the business should it be required. It is likely that the results of the review may lead to an increased regulatory burden on the Sipp provider which itself could increase costs of the product.
SSASs, being individual occupational trusts are subject to regulation by The Pensions Regulator (TPR). Unfortunately SSASs, having no compulsory professional body acting in the interest of scheme beneficiaries, have been subject to some misuse by way of pension liberation, a matter that both TPR and HM Revenue & Customs are aware of, with the expectation that preventative measures may be implemented, potentially increasing costs of SSASs also.
Complaints concerning maladministration under either arrangement would fall under the remit of the Pension Ombudsman, while mis-selling of a Sipp, fees or other matters would be referred to the Financial Ombudsman.
Finally, while the Financial Services Compensation Scheme may cover failure of a Sipp provider, no such protection exists for a SSAS. Failure of investments held within either vehicle would depend upon the type of asset and custody of ownership.
Results
Obviously some client circumstances will point an adviser clearly in the direction of either SSAS or Sipp. For some others the decision might not be so clear-cut.
Once a decision has been made as to which of the two vehicles is appropriate, only half the job has been done. The next hurdle is to determine a provider of the service that best meets client expected requirements.
Ian Stewart is joint managing director of Dentons Pension Management
