Ask the Experts: My client has a 4 member SSAS, both parents and two sons. The parents are approaching age 75 and have asked about allocating their funds down to the sons...

Question:

My client has a 4 member SSAS, both parents and two sons. The parents are approaching age 75 and have asked about allocating their funds down to the sons.

My AXA representative has said that monies cannot be allocated down, but the all the growth on the schemes assets can be apportioned to the children, whereas the existing professional SSAS trustee has advised that the apportionment of growth other than in accordance with either the common fund principle OR in accordance with earmarked assets represents an unauthorised member reallocation and would trigger a tax charge. Which is correct?

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Answers:

Andy Zanelli: AXA has a long established SSAS product, The Suntrust Plan, which will not allow the reallocation of pooled fund assets as described.
However, it is possible, in certain circumstances, in a provider sponsored individual trust scheme to allocate growth in other than strict proportion - for example to reflect the growth of assets notionally (but not actually) attributed to different scheme members."

David Seaton:  Where assets of a pension scheme are pooled within a common trust, most usually in small self-administered schemes (SSAS) and family pension trusts (FPT), the trustees have some scope to allocate growth of the fund between the members. Most scheme documentation identifies a member's pension fund as being the contributions made by and for the member plus the growth and expenses as agreed by the trustees. In this case it is impossible to give a categorical answer without sight of the trust deed and rules to see what is possible under the definition of a member's fund.

The general principles are as follows:

Firstly, it is important to understand that within trust law a trustee must act as would a prudent man acting in respect of his own assets.

Secondly, Finance Act 2004 was amended in 2005 and Section 172A states:

If a member surrenders, or agrees to surrender:

a) Any benefit or prospective benefit under a pension scheme;
b) Any rights to payments under a lifetime annuity;
c) Any right in respect of any sums or assets held for the purposes of the pension scheme;

The scheme is to be treated as making an unauthorised payment to the member. Therefore any reallocation of a member's fund will give rise to an unauthorised payment.

In any agreement that the members and trustees wish to make in respect of the allocation of fund growth they must act reasonably and fairly. If they fail to do so HMRC may decide they have not acted as prudent trustees, have breached the bona fides of the scheme and created an unauthorised member payment and issue a tax assessment accordingly.

Nevertheless, within a scheme it is possible to have members with very different attitudes to risks, investment objectives and requirements. Younger people with more years to taking benefits are more likely to be prepared to take a higher risk than those about to take pensions.

It is therefore reasonable and acceptable for the members of the scheme as trustees to agree amongst themselves a formula for allocating the growth of the scheme. For instance a retired member drawing a pension under unsecured pension or alternatively secured pension may well be happy with a stable return of a gilt yield, say 4%, leaving the remainder of the return to other members. As part of that agreement it must also be accepted that if the overall return is less than that required to meet a return on the gilt yield for the member then the other members will receive a negative return for that year and their fund will reduce. Clearly if one member has a fund of £1,000,000 and the other member a fund of just £10,000 then the member with the small fund has little fund to effectively guarantee any growth for the other member and such an agreement could not work. It would also seem inappropriate for anyone to expect a return of less than the gilt yield inside a pension fund.

Stewart Dick:  "The issue of reallocation of assets or apportionment of growth under a SSAS is something of a grey area and there are different opinions in the marketplace. We have spent a considerable amount of time looking into this, and would certainly agree with the comment you've had from AXA that assets cannot be reallocated.

While we believe that it may be possible for the growth on assets to be distributed to other members, it is not clear that HMRC share that view. The process involved is very convoluted and operates on the principle that a member drawing income will need a limited level of growth (as they will be aiming to reduce their fund to limit the impact of taxes on death) while another, younger, member will be seeking a higher level of growth as they seek to build their fund up. The administrative burden for such an arrangement is high, and any potential benefit is limited - at best a growth differential can be achieved rather than any reallocation of assets or benefits; and this of course assumes that a good level of growth is being achieved which may not be certain in the current climate. In light of this, and the fact that we are not sure how HMRC would view this sort of transaction, we do not offer any apportionment of growth under our SSAS.

If the intention is for funds to be passed down to younger members, an alternative solution would be to draw as high a level of income as possible from the fund (perhaps using Scheme Pension which will almost certainly offer a higher income than ASP for those over 75) and then use the 'gift out of income' rules to pass cash to children or grandchildren. Provided this is done within the basic criteria the funds are out with IHT calculations. This cash can also be used to fund pension contributions for children or grandchildren - the tax relief goes some way to offsetting the tax paid on the original income (naturally contributions and tax relief will be subject to the usual limits and the individual circumstances).