SSASs

-- SSASs --

SSAS

Introduction

For the family operated company or entrepreneurial director the SSAS is the most effective pension vehicle for long term planning and family protection, for short term company planning with respect to flexible investment options and also the significant pre-retirement tax planning and savings.

The Finance Act 1973 made it possible for controlling directors to join occupational pension schemes and the small self administered scheme was created for this purpose. The Pension Schemes Office (PSO) introduced the concept of the pensioneer trustee (PT) with the Association of Pensioneer Trustees (APT) being formed in 1979. The PSO also issued memorandum no. 58 this being the main guidance for the operation of a SSAS until August 1991 with the introduction of Statutory Instrument 1614, The Retirement Benefits Schemes (Restriction on Discretion to Approve) (Small Self Administered Schemes) Regulations 1991. The PSO was replaced on 1 April 2001 by the Inland Revenue Savings, Pensions, Share Schemes (IR SPSS).

As a SSAS is an occupational pension scheme it is subject to the Pensions Act 1995. Certain provisions apply to all SSAS, such as the jurisdiction of the Occupational Pensions Regulatory Authority (OPRA), limited price indexation (LPI), disclosure of information, trustee duties and equal treatment provisions. If the SSAS meets certain conditions then they can be exempt from provisions of the Pensions Act 1995.

The official definition of a SSAS is 'a scheme with less than 12 members where at least one of those members is connected with another member, or with a trustee of employer in relation to the scheme'. Inland Revenue memorandum 109, August 1991, also adds 'a scheme is defined as self-administered if some or all of the income or other assets are invested otherwise than in insurance policies'.

Who can have a SSAS

Due to the higher investment risks associated with a SSAS, membership is usually restricted to controlling directors. The number of members is limited to 11 and one or more of the members must be connected. This means it is often the case that private family operated companies opt for a SSAS and there are typically only 2 or 3 members.

The IR SPSS could consider membership of 12 or more to be a SSAS if it deemed the numbers were increased to avoid SSAS regulations. It is possible for a public limited company to operate a SSAS where one or more of the members are connected. In all situations only one SSAS is permitted per company and it is possible for a single SSAS to be available for a number of associated companies.

Establishing a SSAS

A SSAS ia an exempt approved occupational pension scheme that must be established under an irrevocable trust with associated trust deed and rules.

To benefit from exemption of some of the provisions of the Pensions Act 1995, the trust rules must provide for decisions made by unanimous agreement. In most cases the trustees are all the members plus the pensioneer trustee and all members must be given written notification of the scheme details and benefits thereof.

It is important to establish a bank account in the name of the trustees so that the assets of the company are kept separate from those of the SSAS members. At all times the Inland Revenue require that the PT is a co-signatory of the bank account.

When the SSAS is submitted for approval to the IR SPSS it must be accompanied by an actuarial valuation report (AVR). This report will detail the members income, ages, retirement age, the maximum funding limits, assumptions made to determine the limits, the initial contribution rate and how the assets are invested.

Pensioneer Trustee

The IR SPSS require that every SSAS appoint a pensioneer trustee (PT), an individual or company that usually is also a member of the Association of Pensioneer Trustees (APT). The APT aims to maintain the highest possible professional standards and has 200 members including 35 insurance companies.

These members have been granted their status as a PT from the IR SPSS in part because of their ability to negotiate with this and other government departments. The PT is also considered experienced in administering a SSAS and is expected to ensure the SSAS complies with all rules and regulations. A pensioneer trustee therefore acts as a watchdog for the IR SPSS.

The Finance Act 1998 introduced rules that mean the PT appointment cannot be terminated without first appointing another PT to the position, except where the scheme complies with the winding up rules, in an attempt to prevent SSAS busting.

The Pensions Scheme Office further sought to strengthen the position of the PT in Update 69 which required the pensioneer trustee to be the co-signatories of the SSAS bank account and co-owners of the SSAS assets. This means that the SSAS pension fund cannot make purchases or sell assets without written authority from the PT, and this thereby strengthens the role of the pensioneer trustee and expands their role to beyond the winding up of a SSAS.

Permitted Investments

The principle of all occupational pension schemes including a Small Self Administered Scheme (SSAS) is that they provide relevant benefits for the members at retirement or on death. This means the IR SPSS must ensure that a SSAS does not give non-relevant benefits to members or to those persons connected to them.

Regulation S11614 requires the IR SPSS to approve investments that provide relevant benefits at retirement or death. These investments cannot provide direct or indirect benefit to the members, such as the SSAS purchasing a residential property to be used by a member and that member's family. Permitted SSAS investments are as follows:

Property

A Small Self Administered Scheme pension fund can be used to purchase the commercial property occupied by the company as the company is considered as a separate legal entity. It is not possible to purchase property from a SSAS member as this is a connected person. This route of the SSAS purchasing a property has to be compared with the company or the directors buying the property.

By using a SSAS pension fund to buy the property there would have been corporation tax relief on contributions to the SSAS. This means it costs less for the SSAS to buy the property than the company as the later would make the purchase net of corporation tax.
In a SSAS there is no liability to capital gains tax on any subsequent sale of the property and all rental income paid by the company to the trustees would not be liable to income tax. Furthermore the rent paid by the company is an allowable expense against corporation tax.

There are risks if the property represents most of the assets in the SSAS pension fund, leading to a lack of diversification and the risk that it could be difficult to sell the property to realise the proceeds at retirement. If the SSAS purchases the property the company cannot use the property as security, or receive any capital allowances on industrial buildings.
The SSAS must always charge the company a fair market rent and if the SSAS borrowed money to purchase the property it cannot receive income tax relief on the cost of servicing these borrowing.

Loans

The trustees of the Small Self Administered Scheme are allowed to make loans from the pension fund to the company or any associated company for the company's business. This must be for a specified fixed term and at a commercial rate of interest with the terms clearly indicated in a loan agreement including confirmation of this loan from the pensioneer trustee.

The maximum size of the loan as a percentage of the SSAS pension fund is 25% within the first 2 years of the existence but this cannot include any pension transfers from another scheme. After 2 years the loan can be 50% of the SSAS pension fund, however, these percentages exclude any assets that are earmarked for a member that has retired or died.

The IR SPSS state that the purpose of the loan must be for company business purposes only such as purchasing commercial property or plant and machinery. The term can be any as agreed by the parties that is consistent with the purpose it is to be used for and the interest rate charged must be bank base rate plus 3%.

Borrowing

The trustees of the Small Self Administered Scheme can borrow money to buy an asset if the pension fund does not have the resources. The reason for the borrowing must be commercial, such as purchasing commercial property.

The IR SPSS set maximum borrowing limits as 45% of the market value of the SSAS pension fund plus 3 times the employer's annual contribution plus 3 times the members' annual contributions but excluding the value of any assets that are earmarked for a member that has retired or died.

Borrowings must be notified to the IR SPSS except where the term is less than 6 months and the amount borrowed is less than the lower of £50,000 or 10% or the current market value of the SSAS pension fund.

Unlisted Shares

The trustees of a Small Self Administered Scheme pension fund can purchase up to 30% of the shares in an unlisted company. They are not permitted to purchase shares from the members or persons associated with them and therefore the trustees cannot purchase the company sponsoring the SSAS. There are also limits on the voting rights of the shares and the dividends received, this being limited to 30%.

The PSO have indicated the following as acceptable investments for a SSAS:

Company Shares
Deposit Accounts
Copyrights
Financial Futures
Commodity Futures
Traded Options

Prohibited Investments

There are a number of investment activities and investment assets that are prohibited. The Small Self Administered Scheme trustees cannot make a loan:

To SSAS members or people connected with the member
To the sponsoring company or associated company at a non-commercial rate
To the sponsoring company or associated company unless the loan is used for approved commercial purpose
To companies that are insolvent
To keep a failing company from insolvency

The IR SPSS prohibits the use of investments as follows:

Residential property, unless it is linked to a commercial property and not occupied by a member or a person connected to a member
Third party loan, which directly or indirectly results in the member receiving a similar loan from a third party
Non-relevant benefits, conferred on a member as a result of an investment by the SSAS
Purpose of the scheme, where the IR SPSS believe the investment does not match the scheme purpose for the members

The IR SPSS prohibits the following direct investments:

Antiques
Rare Stamps
Rare Books
Gemstones
Works of Art
Yachts
Gold Bullion
Krugerrands
Furniture
Jewellery
Vintage Cars
Oriental Rugs
Fine Wines

Corporation Tax Relief

There are significant tax planning opportunities for the company when making contributions to a Small Self Administered Scheme. The contributions the company makes to the SSAS are relived for tax in the accounting year they are paid and this applied to both regular and single contributions as long as these payments are within maximum funding rules.

Since 1 June 1996 a company can receive corporation tax relief in the accounting year that a single contribution of up to £499,999.99 is made to a SSAS (this includes any regular contributions made during the year to the SSAS) as long as this contribution is justified by the scheme actuary. For amounts of greater than £500,000 or 210% of the contribution paid in the previous period the corporation tax relief will be spread over 2 or more accounting periods as follows:

SSAS Tax Relief spreading

Special Contribution Spread Amount

£500,000 - £999,999.99 2 years

£1,000,000 - £1,999.999.99 3 years

£2,000,000 plus 4 years

By making special contribution the company can reduce the profits it makes or even make a loss for that accounting year. This loss can then be used to offset profits made in the accounting year immediately preceding, as long as this contribution is justified by the scheme actuary. The trustees should review the SSAS position 2 months before the end of the accounting period. Any unexpected company profits could then be applied through the SSAS for tax planning purposes.

If an over funding situation is created by this special contribution the PSO may require the surplus repaid less 35% tax if other methods of reducing this surplus are not applied.

Pre 1989 Contracts

Many sponsoring companies will have converted an pre 1989 EPP contract to a Small Self Administered Scheme and this offers attractive planning opportunities for retirement. Under these contracts where the SSAS is using the existing trust under the previous regulations, the final remuneration is not subject to the earnings cap.

The retiring member must use the annual remuneration from the 3 consecutive years that produce the best average for final remuneration. This means that forward planning could significantly increase the maximum amount that could be paid into the SSAS at retirement that can increase benefits to the member and reduce or eliminate corporation tax for that accounting year. Alternatively, the retiring member can consider remuneration earned over the past 13 year period to find the best 3 consecutive years.

Taking Benefits

Due to the nature of the underlying assets in the Small Self Administered Scheme pension fund such as commercial property, the Inland Revenue allow the SSAS flexibility in the way the trustees can provide pension benefits to the members and survivor. This flexibility is allowed because it can be difficult to realise a market value for a property if it must be sold quickly to provide a SSAS member pension benefits.

Most SSAS arrangements will allow income drawdown of benefits as long as they comply with various rules. The trustees must purchase an annuity by the member's 75 birthday although an annuity to provide the pension income can be purchased at any time from retirement age to age 75. The trustees must also review the annuities market to determine a suitable time to make purchase. Once purchased an annuity it cannot be changed, so learn more about pension annuities and secure a personalisedannuity quote offering guaranteed rates.

The actuary must ensure that the level of pension income in drawdown can be maintained by the SSAS assets and this forms part of the actuarial tri annual review of the SSAS. The actuary must also ensure that the pension income paid to the member is within 10% of market annuity rates.

As long as there are enough assets in the SSAS pension fund to provide the member with an income between the age of 70 and 75 of an equivalent pension annuity, the SSAS can continue to invest in commercial property. However, loans and borrowing will be restricted by deducting those assets from the SSAS pension fund earmarked for the member's retirement benefits before the 45% asset value limit can be applied.

If the member dies during income drawdown, the dependant's pension can be funded from the Small Self Administered Scheme asincome drawdown until the dependant's 75 birthday or the date the member would have reached aged 75. For death benefits attached to the SSAS, where these are greater than the member's share of the SSAS pension fund the trustees must insure the surplus with a life cover plan.