The changes and freedoms that were introduced to the UK pensions system in April 2015 by chancellor George Osborne have made small self-administered schemes (SSASs) even more attractive to entrepreneurs and small business owners. In part, this is due to a SSAS providing an attractive tax wrapper for company directors and senior employees, assisting not only in the provision of retirement savings and succession planning but also in the development of the company itself by self investment and capital/asset swap with the sponsoring employer.
SSASs also allow the scheme members, in their capacity as trustees, to control the scheme’s investments. A SSAS is a registered pension scheme with HM Revenue and Customs (HMRC) and as such, there are responsibilities and obligations on the scheme trustees and/or the scheme administrator.
However, in practice, the knowledge needed to fulfil this role is great and the potential tax penalties and fines for omissions or errors can be very high.
In 2006, the role of the pensioneer trustee (a professional trustee) was removed as a condition of a SSAS’s initial and conditional approval. This led to a number of client companies/schemes removing their incumbent professional trustee along with the now redundant actuary with the intention of saving money. The consequences of this have been a number of schemes being poorly run and scheme rules not being adhered to or updated with current pension legislation, both of which could lead to tax charges.
Individuals operating without the assistance of a professional trustee or scheme administrator may struggle to meet their duties. Conflicts may arise where they are acting in the capacity of company director/member/trustee. An independent specialist is often the way to avoid these problems. As a result of this there has been an increase in SSAS clients looking for formal guidance on their schemes where they are currently non-professionally advised. In particular where SSASs are concerned they must now also comply with the “fit and proper administrator” requirements. These requirements became effective from 1 September 2014 and are now starting to have a real impact on schemes. If there is no ‘fit and proper person’ in place or indeed there are concerns over them, HMRC may withdraw the scheme’s tax registered status which can have severe tax implications for the scheme beneficiaries.
SSAS practitioners may offer a variety of services but most advisers agree that the only way their client can be fully reassured that the scheme is operating correctly is if a proactive role is provided.
For advisers, there is a real business opportunity when advising entrepreneurs and small businesses on their pension arrangements around a SSAS. So what does an adviser need to consider when talking to a SSAS that has been self-run?
Scheme documentation
A SSAS as a minimum should have informal annual statements drawn up. These should detail:
– The contributions paid
– Any assets held
– Income received by the SSAS
– Benefits paid to beneficiaries
In addition, each individual member should have an annual statement. These should detail:
– Contributions received for them
– The value of their proportion of the pension fund.
Asset documentation
Any assets held by the SSAS should of course be properly administered. These should include documentation confirming good title and ownership of the investment and frequent valuations. Where more complex investments exist further information should be held.
For commercial property, leases and rent reviews should be documented and be kept up to date. Certificates of insurance should also be available. Rent that is received from a connected party, should be evidenced as being on what is known as ‘arm’s length’ terms and this must be evidenced in writing by a professional valuation.
Designated scheme bank account
It is important that there is a designated scheme bank account for the SSAS so that there is no danger of any monies going into the employer company’s own account(s). If this were to happen the money moved could be seen by HMRC as an unauthorised employer payment and a tax charge would be triggered from the date the money entered the employer’s bank account.
Lending
As many SSASs are used to help invest in and grow the company, loan backs are often utilised. The lending rules were tightened considerably in 2006 and for very good reason. They now require each loan that is made to the employer to be secured by a first charge and this must be appropriately documented. There should be a schedule of repayments along with details, and documentation of the security held should be available.
There have been cases where this documentation has been missed or is in fact incorrect and this can again lead to an onerous tax charge.
Taking over
Advisers and SSAS operators that take over a SSAS which has been run without professional help can spot errors and correct them, although in some cases tax charges may have been triggered. HMRC are not ogres and if the errors are relatively small (such as the late filing of the scheme’s annual tax return) and/or have since been corrected, the likelihood of HMRC investigating the scheme further (a process which itself can be time-consuming and expensive) is reduced.
A change of registered administrator, to a firm that is known by HMRC to meet the ‘fit and proper person’ criteria may also give the Revenue some level of comfort that the scheme trustees are ensuring that appropriate guidance is in place and that the scheme is most probably in good administrative shape.
For the SSAS scheme itself, it should always be remembered that the actual SSAS trust remains in place. Appointment of a new or replacement trustee/administrator is not a transfer of the entire scheme, it is simply a change of advisor to the scheme. The ownership of the assets will need to be re-registered to reflect the custodianship of the assets in the new set of trustees. This is where most of the costs with a SSAS takeover are incurred, particularly if a property is involved and solicitors need to be appointed. Another potentially problematic issue is where there is a mortgage outstanding. The lender, in assessing the change in trustee, may potentially look to alter the terms of the mortgage although these of course could just as easily work in the favour
of the lender. Even if no changes to the terms of the loan are imposed there may be at the least an admin fee to facilitate the change. It is important that the costs of a takeover are understood at outset and for this reason for the adviser to be able to give as accurate a picture of the scheme to any new professional trustee so that best estimates of costs can be given.
In return the client will have the reassurance that the scheme is in good hands and that fines and penalties should be avoided.
A professional trustee is also likely to pick up any newly proposed inappropriate investments that the lay trustee or member might otherwise entertain, the failures of which have been the subject of recent industry press.
So advisers should not shy away from SSASs but rather see them as an opportunity to add real value to their clients and their businesses.
David Fox is director of sales and marketing at Dentons Pension Management
