In the last few years SIPPs have often been the preferred solution for pension planning, as they make it possible to tailor an investment portfolio and buy commercial property. The predecessor of the SIPP, the SSAS, has not gone away though, and many providers are reporting a healthy increase in the number of new SSASs that they are setting up.
SSASs were originally developed to allow small businesses to save into a pension scheme and use the fund in the business. In the current economic climate this is becoming an increasingly desirable feature for small firms that are seeking finance to expand or maintain their business through a difficult period.
In the past the normal source of finance has been the bank - particularly if the company has built up a close relationship with a local branch. However, in the aftermath of the ‘credit crunch’ the story has been different. We have all heard horror stories of double digit interest being quoted for loans, and the difficulties with money being created by the Government finding its way to small business. It seems that banks generally are being difficult, insisting on valuations and property being sold, and using poor LTV ratios to increase interest rates.
Using a SSAS, the company can borrow directly from the pension fund to assist with the day-to-day running of the business. The amount of the loan can be up to 50% of the fund’s net market value immediately before the date of the loan, and can include transfer values bought into the scheme.
There are a number of other conditions that need to be met:
It is important that this is done properly. The trustees of the SSAS must satisfy themselves that the company’s financial circumstances are healthy, and that the loan is a prudent investment of the pension scheme, and is not just being used to prop up a failing company (cf. Greenup and Thompson Pension Ombudsman case 2008).
In summary, the key features of borrowing from the pension scheme are as follows:
As an alternative to the company borrowing from the SSAS, the pension scheme can directly purchase an asset - usually a commercial property. This can be from a third party, or it could even be from one or more of the directors, who hold it in a personal capacity. It might even be possible to enter into a shared property purchase with the pension scheme.
Selling the property into the pension scheme can also be a way of providing capital for the business without the need to involve a bank!
There are a couple of other factors that are also keeping the SSAS market buoyant. Firstly, a SSAS can often be less costly than a SIPP if there are a number of directors/members involved.
Secondly, after A-day in 2006 a lot of administrators/pensioneer trustees removed themselves from SSASs. This meant that the duties surrounding reporting and tax fell back on the ordinary trustees. Add to this the subsequent complexities of the lifetime allowance, the annual allowance and the various types of protection available, and you can see that the complexity has risen, with an increased risk of detriment to the individuals and to trustees of getting it wrong.
Do not rule out SSAS as a solution or miss the opportunity to update an existing scheme.
Mike Morrison