Pensions are one of best tax mitigation
strategies for Business owners
SSAS Pensions are an ideal form of pension for many businesses (as well as partnerships) but are not as widely used as stakeholder pensions and SIPP’s, perhaps because most people know very little about them. Though not suitable for every business, they are particularly useful for smaller, owner-managed or family-run businesses that are run as limited companies or partnerships. For such businesses, Small Self-Administered Schemes can be inexpensive to set up, easy to run, flexible and most importantly, tax efficient.
The whole purpose of an SSAS pension is to act as a form of money purchase (defined contribution) pension scheme and therefore to provide retirement benefits to the members of the scheme. It also allows the members of the trust to act as trustees and to be fully involved in the management of funds and investments. It is designed to be a flexible pension for a small number of members, applying that flexibility to the retirement options of its members, the way contributions and transfers are handled and most particularly, the range of investment opportunities the pension may invest in, including commercial property and even investments in the company of the sponsoring employers.
Because SSAS Schemes are occupational pension schemes, they can be established by any UK registered company, (although they must not be established by a member of the scheme.) The company establishing the scheme will therefore almost certainly be a UK limited company or a limited liability partnership, so that there is a separate legal identity from the partners or directors.
The best way to picture the structure is to look at all the people involved, from the top down. These include the sponsoring employers, the trustees, the scheme administrator, scheme practitioner and the members:
Sponsoring Employers – Sponsoring employers refers to the original company employers who set the scheme up (and occasionally to employers who have subsequently been added by deed.) They are the ones who will make contributions into the SSAS on behalf of their employees. Equally, one of the unique features of an SSAS is that the scheme is allowed (by revenue customs -authorised and regulated ) to invest back into these same sponsoring employers so long as they meet a number of qualifying criteria.)
Trustees – Trustees are made up of the original trustees who were appointed during set up or (in a similar fashion to the sponsoring employers) who have been appointed subsequently by deed. They are often members of the scheme, though they don’t have to be. They can be individuals or a body corporate and they must have the capacity to act as a trustee, the definition of which includes being able to contract and not being prevented from doing so by either the Pensions Regulator or the courts. Most will have an independent professional trustee although the legal requirement for a trustee authorised by HMRC (referred to as a Pensioneer Trustee) was removed back in 2006. The way it is structured, means that even though they are not beneficiaries or members, trustees are actually legal owners of the trust and any assets it has. These trustees are tasked with ensuring that the scheme is being managed according to current pension regulation and must act responsibly, prudently, impartially and in the interest of the beneficiaries and members.
Members – Members will also be beneficiaries of the SSAS and membership can be offered to any company directors, family members, current employees, former employees or future employees at the discretion of the Employer and Trustees. However, not all beneficiaries of the scheme will be offered membership. Membership is divided into 4 categories:
Active Members – these are members who currently have benefits accruing in the pension.
Pensioner Members – these are members who are not active members but who are entitled to receive their benefits from the scheme.
Deferred Members – Deferred members are members who have rights under the scheme but who are neither pensioner members nor active members.
Pension Credit Members – Pension credit members are members who have rights in a pension scheme that are indirectly or directly attributable to pension credits.
Scheme Administrators – A scheme administrator is an individual or body that has been appointed by the trustees of the scheme to perform the administration and reporting requirements according to the law and the wishes of the trustees. They must meet the ‘fit and proper person’ test as set out by HMRC and be registered with HMRC.
Scheme Practitioners – Scheme practitioners will perform tasks and act for the scheme administrator in the same way as an accountant might act for someone’s business. Pension scheme practitioners can file on behalf of the administrator, however it is important to note that it is still the Administrator who has responsibility for anything that has been filed and for the tax charges that are levied on the scheme by HMRC.
When it comes to the benefits of an SSAS the first thing to bear in mind is that as with all pensions, it allows you to get tax free reliefs (Income Tax, Capital Gains, ) on your qualifying contributions, whether you made them, or whether they were made on your behalf. You are allowed to consolidate all of your previous pension schemes by transferring them into the SSAS and should you wish, can also transfer out any benefits you accrue under the SSAS to another pension scheme at a later date. As with all pensions, funds held within the SSAS are free of tax and the sponsoring employer can pay all the administration expenses, meaning you have no fees or charges eating into your pension. When you retire you are allowed to take a lump sum out of the SSAS pension (normally up to 25% of your share of the fund) and depending on your employer you may be allowed to retire from the age of 55 onwards. You can take a pension income directly from the SSAS or use your funds to purchase an annuity separately and you can pass on your funds to beneficiaries of your choosing without them having to pay inheritance tax. Members can be fully involved in the management of funds and investments and the range of investments open to the SSAS is extremely broad. These include property and even investments in the company of the sponsoring employers. It is also able to loan money back to the company of the sponsoring employers. Another bonus is the tax free lump sum.
As with all money purchase pension schemes that rely on investments, the retirement benefits of an SSAS that you get when you retire will depend on the amount you have contributed into the SSAS combined with the performance of the investments at the heart of the SSAS pension. If these have gone down, then your retirement funds will not be as large as you might have hoped. Other factors that might affect your pension include the timing of your retirement – if you plan on purchasing an annuity when you retire then you will again be at the mercy of market fluctuations and annuity rates which could see you receiving less income than you hoped. One thing to point out is it’s not regulated by the financial conduct authority but is registered with HM Revenue and Customs (HMRC)
Basically, in the same way as other defined contribution pension schemes. Members of the scheme and/or their employer make pension contributions into the SSAS and receive the same tax relief on those contributions as any other type of pension. When they come to retire, an SSAS can be quite flexible on how they take their income, allowing them to draw tax free lump sum from the age of 55 onwards or work part time and receive some income, or even take a small lump sum to start with. The only difference is in the way an SSAS is structured.
Quite smartly, actually. SSAS pensions are tight structures and an SSAS is an asset that can be passed on to other generations and inherited. Because it is a pension it is fully protected against creditors (either personal or company creditors) and all the investments in the scheme are owned by all of the trustees, whilst each member of the SSAS holds their own specific proportion of the fund. This is why it is easier, for example, to hold property in an SSAS as the ownership of property is easier in one SSAS than split across a number of different SIPP’s. All members of the SSAS are permitted to be trustees too, although a lot of SSAS schemes will also hire an independent and professional trustee who knows their way around the relevant pension legislation and who can deal with HMRC. These professional trustees used to be a legal requirement but are now merely recommended.
A lot more than other pensions. This is one of the main advantages of a SSAS pension– members have a lot more flexibility to choose from a far wider range of investments, particularly commercial property. Indeed, for any business that is connected to land or property this is an essential feature of an SSAS – the ability to purchase more property or land in order to expand their business whilst keeping that land / property in the pension fund. Indeed, the SSAS is allowed to lend money to the company in order to purchase that property or land and in turn that property or land can be leased back to the company to use. This is an incredibly tax efficient way for the company to both expand and invest in commercial property. Similarly, the SSAS itself is allowed to borrow money in order to invest and can choose to invest in the company’s premises. The SSAS would buy the company’s premises and then cover the loan repayments with the rental income from the company to the SSAS, another tax efficient investment.
Very flexibly is the short answer. As mentioned above, they can choose when they take their pension, either taking it early (from the age of 55 onwards) or delaying it till later if they want to continue working. They can even keep doing some part time work for the company and take a little pension income at the same time. And when they do take their pension they are permitted (as with other pensions) to either take it as income, lump sum or a combination of the two. However, if a lump sum is taken, it will only be tax free up to 25% of the value of their full entitlement.
This is another important feature of these pensions – if they are managed well they can be passed along to beneficiaries and through families like most other assets and investment. And because they are pension schemes they offer a way to pass on assets that are protected and tax efficient.
The best way to understand this scheme is to look at a case study. In this example we will consider two brothers, Cain and Abel, who are in their mid-50’s and who share a village store which they own 50/50. The store has £100,000 cash in bank account and is expected to make about £200,000 profit by the end of the year. Each of them has made their own pension savings over the years and they both have about the same – £80,000 each in a personal pension.
Aims – they have decided to capitalise on the expanding population of the village and want to buy a neighbouring investment property which is on sale for £240,000. They are thinking about using their cash and taking a mortgage but at the same time are unsure as they don’t want to pay interest. They decide to talk to a SSAS professional regarding this investment.
Advice – Their financial advisor comes up with a different solution. They should set up a SSAS pension in which the business would be the sponsoring employer and they, Cain and Abell, would be members. Then they could transfer their existing pension arrangements (with a combined value of £160,000) into the SSAS. At the same time the business itself could make an employer pension contribution of £40,000 each on their behalf. The SSAS would then have a total value of £240,000 which they would own 50/50.
Solution – Because the business made £80,000 in employer contributions, it would likely see a reduction in corporate tax for the year. The SSAS would be able to buy the neighbouring invesment property without having to take a loan from anywhere and it would be the owner of the property. However, they are 50/50 owners of the SSAS as it is their pension fund. Thereafter the SSAS would lease the property back to the business. The rent the business pays would be a deductible cost and would at the same time accumulate within the pension scheme, meaning the pension fund would eventually consist of a sum of cash (or investments) and a portion of that property.
Note SSAS pensions are not regulated by the financial conduct authority but is registered with HM Revenue and Customs (HMRC)
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