Small Self-Administered Scheme pensions and how they work

Family businesses have been using Small Self-Administered Scheme pensions for years to reap the investment and tax benefits for business and personal planning. Gareth Bertram of The Landlord's Pension explains how they can work.

 Small Self-Administered Scheme pensions

HMRC regulations state that a SSAS can only invest in or hold commercial property

As a company director, you run your own business and you are an expert in managing your own decisions and strategies, so why not take control and manage your own pension?

The word pension is not something that evokes excitement and urgency in many. To most, it conjures up thoughts of old age, inaccessible funds, and uncertainty. Placing reduced value on funds held within pensions is common with many dismissing them as locked until age 55, ‘non-accessible’, ‘not real money’ and leaving them sat dormant until retirement. Others might label pensions as complicated and time consuming with little opportunity for control. These are myths that must be dispelled; your pension is a pot of your money, much like the funds you have sat in your other business and personal bank accounts.

Access your pension funds before age 55

What many business owners are not aware of is that even before the age of 55, they can take control of their pension funds and invest them at their own discretion, simply by switching to a Small Self Administered Scheme pension (SSAS). As the most flexible UK pension available, it also offers the most control. By transferring your dormant workplace or personal pensions to a SSAS, you can gain control of how your funds are managed and invested.

All in one pot

Combining multiple pensions has many advantages, such as increasing investment capacity and choice, just one scheme to monitor and only one set of fees and charges. In addition, not only can you combine your own pensions into one scheme using the SSAS, but you can also invite up to 11 others to become members of the SSAS. Invited members can include other company directors, key employees, or family members. Each of these members can transfer their own pensions into the SSAS, pooling funds to further increase investment choice and ability. Regardless of the number of scheme members, only one set of fees and charges per scheme are payable, potentially providing considerable savings for all members.

 SSAS origins

Surprisingly, the SSAS has been around for over 40 years. It was designed by HMRC, exclusively for company directors to give them more control over their pensions and to support businesses. As a corporate pension, it is not governed by the FCA but the SSAS is regulated by The Pensions Regulator. Schemes must also be registered with HMRC and abide by HMRC rules and regulations.

What can you do with a SSAS pension?

As already mentioned, a SSAS is an extremely powerful and flexible business tool. It is afforded all of the same benefits that traditional pensions enjoy, as well as additional advantages, such as the ability to loan to the business, invest in commercial property, create a legacy for your family, ring-fence assets, facilitate optimum tax planning and much more.

The power of the SSAS

The SSAS has gained several names over the years, which support its flexible nature and considerable benefits. The Director’s Pension is one such example, denoting its exclusivity for business owners.

Understandably, ‘The business SSAS’ is another common reference for the pension. This is due to its power when used in alignment with business strategy. For example, a SSAS is permitted to loan up to 50% of the total fund value to the business, to be utilised for any valid business purpose. For many business owners, this is a key attraction of the SSAS, avoiding often-excessive loan fees and charges by the banks and affording considerable tax advantages. As per HMRC rules, you set your own interest rate for repayment of the loan, which must be at least 1% above the average base lending rate of the high street, but as you are paying this interest back into your own pension, it may make sense to increase the rate. Profitability within the company is thus reduced, so less corporation tax due, and the payments received into the pension scheme are tax free, within lifetime allowance.

You might decide to use your SSAS to purchase the business premises. Again, an extremely shrewd decision! Rent is paid to the SSAS as a business expense, income received by the SSAS is exempt from income tax and if the property is sold by the SSAS, capital gains is not payable as it is a pension.

To give an example: a loan of £100,000 from your SSAS pension to your business is made. An interest rate of 12% pa is set. At the end of year 1, £12,000 of interest is due. This goes straight back to the pension scheme, tax free (on the basis you are not over the lifetime allowance). By doing this you have saved £2,280 in corporation tax and can then borrow back an additional 50% (£6,000) from the SSAS, meaning the company only has £3,720 less in the bank than it would have had after paying the corporation tax. Between the company and pension, 100% of the capital is retained by not paying the corporation tax.

Of course, every business is different but the SSAS has the flexibility to be tailored to fit your strategy in the most tax efficient and profitable manner.

‘The family SSAS’ is another common moniker used. Succession planning is important, whether for your immediate family or a family business. The SSAS is arguably, one of the most tax-efficient vehicles available for inheritance planning and achieving optimum tax efficiency for your family business. The ability to invite up to 11 family members to the SSAS means that each member is a trustee of the legacy, to be handed down through the generations. Assets are held within the trust, ring-fenced from creditors, and do not form part of the estate, so are exempt from inheritance tax. Retirement benefits can be taken more flexibly, for example cash dividends, leaving property to grow in value and continuing to earn within the SSAS. Cascading the legacy and its assets down through the family in this way is tax efficient, straight-forward and supports family business continuity.

Lastly, let us consider ‘The property SSAS’, another commonly used SSAS reference. For those wishing to invest in property, the SSAS provides the ideal vehicle for either starting their property investment journey or increasing their current portfolio. It is an excellent investment for SSAS growth, due to the tax efficient gains to be made via property. The perceived security of bricks and mortar offering steady and consistent returns renders property a desirable, tangible asset with low volatility, in contrast to the equity markets.

HMRC regulations state that a SSAS can only invest in or hold commercial property. This could include your business premises, commercial development land and many other commercial investment opportunities. However, there are also plenty of ways you can invest ‘indirectly’ in residential property. This could include a loan to your company, to invest in residential property or a loan to an unconnected third party. For those who do not want the time commitment or are not knowledgeable regarding property might look towards hands-off opportunities such as property crowdfunding. This offers enviable fixed returns and a low risk option for growing your SSAS pot.

Starting your SSAS

Setting up a SSAS is a simple, straight forward process. However, as the scheme is a ‘self-administered’ scheme, it is important to understand that unless you are conversant in tax and pension law, it is advisable to ensure responsibility for safeguarding against inappropriate use of or distribution of funds and investments is in place. It is essential that the correct level of support is employed at the start. Many turn to a SSAS Practitioner, offering attractive fees, to setup their SSAS. However, the Practitioner role is not a responsible role and may not deliver ongoing knowledge, support, and advice. A full SSAS service will offer not only setup support, but the provision of a Corporate Trustee to ensure the SSAS does not fall foul of HMRC rules and a Scheme Administrator to carry out reporting and administration duties to ensure the scheme does not encounter penalty. In addition, a full SSAS service will understand your individual situation and present the tools and the education required to build a robust and long-term investment strategy to ensure your SSAS success.

Summary

So, whilst pension apathy is widespread, for those eligible, the SSAS is an exciting, efficient, and mighty gamechanger. By understanding the true power of pension control, your pension funds can be put to work aligning your pensions with your business and personal strategies. All the while, you are continuing to build the pot, helping you to achieve ultimate tax efficiency and providing investment, growth, retirement, and wealth options, previously out of reach.

Gareth Bertram is director of property SSAS provider The Landlord’s Pension 

Further reading: What is a SSAS?

 

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