Small self-administered schemes (Ssas) have taken a bit of a bashing recently. Back in November, the Pensions Regulator urged consumers to boycott Ssas in favour in self-invested personal pensions (Sipps), as the latter provide the safety net of FCA authorisation.
This lack of regulation had led, in part, to Ssas being viewed as the vehicle of choice for pension scammers. However, recent government proposals to clamp down on scams have begun to ease concerns, and in any case, Ssas are still an attractive option for the right business to build or consolidate pension funds.
Despite this, a number of key considerations remain, both for schemes already in place and for those considering whether to establish a new plan.
Existing Ssas
It isn’t unusual to come across a Ssas that was established many years ago, where all of the correct reporting has been completed and the scheme is relatively clean. But this is often hard to ascertain and it can be tempting to just close the scheme down and move it to multiple Sipps. This could be the right course of action, but other issues may need to be resolved beforehand.
In many cases, the Ssas is still the right vehicle for the members and should be left intact. Property held within the scheme could be one reason to stay put, and this will depend on the make-up of the scheme. Dividing a large asset into multiple Sipps could pose a problem. A further sticking point is that the cost may well be prohibitive. Additionally, issues could arise by adding a mortgage on to the property, as this could potentially increase the complexity and cost. The borrowing and title deed are likely to be in the name of the scheme and may well need to be moved to multiple owners and multiple loans for each Sipp.
There are still a significant number of Ssas without a professional scheme administrator. Many of these will need a full review and some remedial work before a professional will be willing to put their name on the line and deal with the scheme.
Although it is a relatively simple task to change a scheme administrator and add a professional trustee, it may be beneficial to move the Ssas to a new scheme where all the legacy issues will be left behind. But those choosing would be wise to be cautious as this will create significantly more work at the outset. This is because if the Ssas has been in place for a number of years, the members may benefit from enhanced pension commencement lump sums or other benefits that could be lost on transfer.
There are many providers that are willing to review and help rectify Ssas that have been left to their own devices, and often at no additional cost, particularly if the provider is set to become the scheme administrator.
Pension freedoms
In the past few years a number of changes to legislation have meant that a new trust deed and rules should be considered for an existing Ssas – especially if they haven’t been reviewed for many years.
It isn’t essential to update the deed and rules in order to access benefits and death benefits available through pension freedoms as the member could rely on the scheme override available under legislation. In any case, it is good practice and will ensure that everyone is aware of what the scheme can and cannot provide.
Fees
Existing and new schemes will have various costs associated with them, and depending on the purpose and content of the plan, these fees will vary dramatically between providers. Occasionally, these fees have been the reason why the Ssas has ended up without enough professional input in the first place.
Having a professional scheme administrator in place is key to ensuring a well-run Ssas. Pensions are complex, and even just the reporting requirements can be quite onerous without even considering the ever-changing legislation and regulatory requirements. Having a professional involved provides another layer of protection from any tax charges that could be incurred by taking the wrong course of action.
Understanding what is underneath the bonnet of the Ssas, and who it should be providing benefits for, will mean that if one member needs to access funds for retirement benefits, or even to transfer out, then it should be easier to deal with.
Many Ssas are pooled funds, meaning that all members benefit from all of the assets. The value of each member’s share is notional, so when access is required the funds can be taken from the most appropriate investment with the trustees’ consent. This can work well when there are large illiquid assets, as well as a range of more liquid assets. But when members have different investment strategies, retirement dates and attitudes to risk, achieving the correct balance can present a challenge. This balance of risk is particularly skewed if one member leaves.
Earmarking some or all assets can make managing members’ risk profiles easier, but if the main purpose of the scheme is for property investment or loans, then it is unlikely to be appropriate.
Pension scams
One of the proposals in the pension scams consultation suggested that only active companies should be able to register a pension scheme. This was mainly because firms had been established with the sole aim of setting up a pension scheme to enable a transfer and possibly be used to gain access to the funds.
The consultation established that issues could arise because there are times when a dormant company may want to establish a new scheme. Extra concerns were raised about the ramifications for sole traders and partnerships.
The government is therefore proposing that all new pension scheme registrations are made through an active firm, except in legitimate circumstances where HMRC will be given discretion to register schemes with a dormant sponsoring employer.
This requirement will extend to existing pension schemes if they are registered with a dormant sponsoring employer, with the same discretion so that HMRC can decide not to deregister a scheme in legitimate circumstances.
This may cause some issues for Ssas going forward if the sponsoring employer has ceased to trade for a legitimate reason. Care needs to be taken by HMRC to ensure that schemes aren’t deregistered by default, but are only done so when there is a good reason. It currently seems like it could be the other way around, causing problems and tax charges for both schemes and members.
Isn’t a Sipp just easier?
For many that aren’t part of a business, it will make sense to have a Sipp, but there are things that a Sass can do that a Sipp can’t.
Under most circumstances, loans from registered pension schemes to the scheme member, or any party connected to them, are discouraged by HMRC rules. Any such loans are subject to unauthorised payment tax charges, which will total at least 55 per cent of the loan value. One exception to this rule is a loan made to the sponsoring employer of a Ssas, commonly known as a ‘loanback’.
In order to be regarded as an authorised (tax exempt) employer loan, five tests have to be met:
• Security
• Interest rate;
• Term of loan
• Amount of loan
• Repayment terms.
Care really needs to be taken when considering or reviewing a loanback. There have been examples where the security hasn’t been registered correctly, deeming the loanback unauthorised, and therefore resulting in extensive tax charges payable by the scheme. However, a loanback can be a great way to fund investment in the sponsoring employer if done correctly and for the right reasons. But in no circumstances should a loanback be used to prop up a failing company.
In addition, it is possible for a Ssas to invest in the shares of the sponsoring employer. However, no more than 5 per cent of the pension scheme’s market value can be used to purchase shares in the sponsoring employer.
If there is more than one sponsoring employer, then a maximum of 20 per cent of the scheme’s market value can be used to purchase shares in all of the sponsoring employers collectively. The 5 per cent per sponsoring employer still applies. The market value is tested at the time the payment is made for the shares and will not be retested at a later date.
There is no restriction on the level of shares for the 5 per cent purchases within the sponsoring employer. In theory, it could own the whole company provided no more than 5 per cent of the pension scheme’s market value is used to purchase it. Where the aforementioned limits are exceeded, the amount will be subject to an unauthorised payment charge on the employer. The scheme will also be subject to a sanction charge.
Despite a number of issues, Ssas remain a good retirement vehicle for many. Although there is no requirement for professional scheme administrators, using one will ensure that the Ssas remains tax-efficient and on the right side of the regulator.
Claire Trott is head of pensions strategy at Technical Connection
