SSAS: some do's and don'ts

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Small Self-Administered Schemes (SSASs) have been available for more than 50 years and, despite predictions that demand would decline after pensions A-Day in 2006, they remain a popular and powerful pension vehicle for owner-managed businesses. However, the pooled structure of a SSAS brings specific rules governing asset reallocation and the allocation of fund growth. This article explores the key do’s and don’ts.

What is the difference between a SSAS and a SIPP?

A SSAS and a SIPP are both self-invested Registered Pension Schemes, but one of the important structural differences is that a SSAS operates as a pooled fund across all of its membership, which can be up to 11 members. In short, where there are two or more members within the scheme, their assets are held collectively by the trustees rather than in separate pots, although it is possible for assets to be earmarked to specific members.

This pooled structure makes way for multiple practical advantages:

• Potentially lower running costs per member: shared administration and investment management across multiple members can be very efficient, depending on the provider’s charging structure.

• Increased flexibility on exit: when a member retires or decides to exit the scheme, assets of equal value can be reallocated between members rather than sold, in turn avoiding any unnecessary disposals

• Multi-generational planning: bricks and mortar assets held for one generation of business owners can be passed onto the next generation within the same scheme structure, provided that no fund value is shifted from one member to another.

An example of multi-generational planning:

Bricks and mortar held within a SSAS for could be reallocated from mum and dad to son and daughter – in exchange for other assets of equivalent value (probably more liquid assets).

So, how would this exchange work?

• The property is valued at £200,000 at the point that it reallocated to son and daughter

• Son and daughter must hold at least £200,000 of assets and benefit entitlement within the SSAS for the exchange to be achieved

• If that condition is met, then the reallocation proceeds without unauthorised member payment tax charges applying to the members

What happens if son and daughter have less than £200,000 of benefit entitlement?

• Allocating the property to them it its entirety represents a shifting of value from one member to another

• Value-shifting between members in a SSAS is only ever likely to take place between connected parties

• It falls foul of legislation that is specifically designed to discourage it

• A smaller proportion of the property (for example £50,000) could be reallocated to son and daughter if they have £50,000 of benefit entitlement within the scheme. The remaining proportion of the property (£150,000 in this case) remains allocated to mum and dad

• Further amounts could be reallocated to son and daughter as and when their benefit entitlements permit

How does allocation of fund growth work in a SSAS?

The pooled nature of a SSAS can mean that there are investment returns from several assets – rental income on a property, loan interest on a SSAS loan to the employer, bank interest, growth on a portfolio of collectives and so on. The scheme can generate returns from several sources simultaneously, with the common approach being:

• Calculate the average growth across all assets annually

• Apply this proportionately to each member’s fund, based on their share of the total at the start of the year

• Adjust for any new contributions, withdrawals or expenses throughout the year

• Communicate any updated fund values to all members at least annually, otherwise members will be in the dark regarding the value of their pension pots

The previous example leads onto another feature of a SSAS, which appears to have been misused in the past by a very small section of the provider community – incorrect allocation of fund growth between the members. Getting these wrong can lead to avoidable tax charges, so however complex it may be, it must be calculated accurately to ensure that each member gets only their fair and proportionate share of the investment growth and understands the value of their pension pots - both for their own individual planning and to ensure that they remain aware of their position relative to any applicable tax thresholds.

Disproportionate growth allocation:

A small number of providers in the self-invested pensions market have historically promoted the ability to reallocate investment growth disproportionately between members – in turn positioning this as a way to manage tax exposure for higher-value members.

The fact that only a tiny proportion of providers chose to swim against the tide and offer or promote such a facility shows that it is open to challenge. Some may claim that their practices have been implicitly accepted by HMRC because it has allowed registration of new SSAS using their documentation, but deep down, that documentation might not actually permit it, and even if it does, it might well be value-shifting.

Stephen McPhillips, Technical Sales Director, Dentons Pension Management Limited

Want to read more about SSASs? See our SSAS Case Studies