Back to basics: What is a SSAS?
A small self administered scheme (SSAS) is a pension set up by an employer for a small number of employees, up to 11 in total. The SSAS is designed specifically for senior executives, directors, entrepreneurs and high net worth individuals, although membership can be extended to other employees and family members.
A SSAS enables the trustees to have control over the investment selection process for your retirement savings. There is no list of allowable investments but HM Revenue and Customs will tax certain assets, such as residential property, which makes them unsuitable as an investment. Generally SSAS’s invest in funds, stocks, shares, and commercial property. If not using the services of a professional SSAS Provider the trustees will need to be clear on what constitutes taxable assets and avoid them.
You may choose to make your investment decisions yourself, or appoint an investment manager or adviser of your choice, if using a Provider they should not dictate this.
In addition to making investments, a SSAS can also borrow up to 50 per cent of its value in order to invest further. This is usually to buy a commercial property but can be used for other assets provided the lender, such as a high street bank, allows this. A SSAS can also lend to what is known as an unconnected thirdparty, but this is fairly unusual and not all SSAS providers will allow this.
SSAS products, unlike SIPPs are able to make loans to the sponsoring employer. This needs to be done in a structured way to avoid any unnecessary tax charges. These are called ‘loanbacks’ and can be up to 50 per cent of the value of the SSAS at the time of the loan. There are strict criteria when making the loan, regarding interest rates, terms and security and advice should be sort before committing to a loan of this type.
A SSAS must be established with an employer, via a partnership or as a sole trader. The scheme is governed by the trust deed and rules which need to be periodically updated in line with changing legislation.
Unlike a self invested personal pension (SIPP) there is no requirement for a third party Provider and the scheme can be managed by the trustee members, although they need to be suitably aware of all the implications of doing so.
Building the SSAS
When you pay personal contributions you can get up to 45 per cent tax relief on those contributions depending on your earnings and personal circumstances. Your employer can also pay into your SSAS and they are likely to receive corporation tax relief on these. The total level of contributions to all your pension schemes each year is checked against the annual allowance, which is currently £40,000. Anything over the annual allowance is subject to a tax charge which varies depending on the level of tax you pay. It is designed to remove any tax relief given over the £40,000 annual allowance. In some cases it is possible to use your annual allowance from the previous 3 years, this is known as ‘carry forward’.
A SSAS can accept transfers from other types of registered pension schemes. In some circumstances assets may be transferred into the SSAS “in specie”. This means that, for example, quoted stocks and shares, commercial property, trustee investment plans (TIPs) and insured funds could be transferred to the SSAS without the need to sell the asset. This would avoid surrender costs and the cost of reinvestment under the SSAS. This may also facilitate contributions and tax relief even if you do not have the cash to make such contributions.
The SSAS will be able to provide you with benefits such as a tax-free pension commencement lump sum (PCLS) and an income from the age of 55. SSASs tend to offer one of the widest ranges of retirement benefit options because of their flexible nature. The options generally include, drawing income directly from the fund or buying an annuity with an insurance company.
Although currently it isn’t possible to withdraw the whole fund as income unless you have other secured pensions of at least £12,000, this is proposed to change in April 2015.
Other changes from April include being able to take any level of income from your pension fund and this will apply to SSASs. This income will be taxed at your marginal rate for that tax year. You can either take all or some of the tax free element up front, or take some with each income segment as it is withdrawn from the fund, giving a great deal of flexibility in retirement.