SSAS - who dares wins

Robert Graves, head of technical services at Rowanmoor Pensions, says A-Day apparently stood for Armageddon Day for SSASs. How wrong the doomsayers were...

Small Self-Administered Schemes (SSAS) have been around for decades, but really came to the fore during the 1990s.

One of the drivers for growth was life assurance companies. With Executive Pension Plans in their arsenal offering company directors a range of insured funds and even a loanback facility, the additional flexibility of SSASs was a threat or even an opportunity that could not be ignored, to retain or obtain funds under management.

Then along came the young pretender, the Self-Invested Personal Pension (SIPP). Although the first SIPP was sold in 1990 their popularity did not really take off for another decade. SSASs and SIPPs rubbed along together quite nicely, with the SSAS’s occupational pension regime rules offering differing market opportunities to those of the personal pension regime governing SIPPs.

To some, A-Day stood for Armageddon Day for SSASs. With just one pension regime (so it was said) what would the market for SSASs be, when SIPPs could do much the same? We have seen fantastic growth in SIPPs since A-Day and little wonder, given their promotion and how they, particularly the SIPP ‘Lite’ versions, continue to fit the bill in retaining and obtaining funds under management, for those whose business model is predicated on this method of obtaining income. SIPPs also fit more easily into the brave new world of the automated, low touch administration processes and wrap platforms.

Consequently, most life companies have now abandoned the SSAS or at best ceased to promote it, and all media advertising and commentary is focused on SIPPs. But woe betide the adviser who has been duped by the hype of SIPPs, into believing that the SSAS is dead, such that they can be ignored.

Independent Financial Advisers are duty bound to provide the best advice across all product ranges whether they be regulated products, such as SIPPs, or unregulated, such as SSASs. Best advice is based upon the principles of knowing your customer, including an understanding of their needs and aspirations.

For directors of small, particularly family run, businesses, the needs and aspirations of the individual and business are inextricably linked. For small businesses, a SSAS can have some positive attractions over a SIPP, to the extent that they should at least be considered within retirement planning recommendations, even if they are not the primary recommendation.

Tailormade for SMEs

The opportunity is potentially huge. According to statistics for Small and Medium-sized Enterprises (SMEs), in 2008 there were an estimated 4.8 million private enterprises in the UK.

Even taking into account that a number of these enterprises will be self-employed or partnerships, a significant proportion is likely to represent director-owned companies.

What do SSASs have that can make them more appropriate for owners of small businesses? On Budget day this year, we heard Alistair Darling speak about how crucial access to finance is for SMEs, but that the banks were still not lending enough. Measures were announced to ensure the Government banks, RBS and Lloyds, make £94bn of new loans; of which nearly half should be to SMEs.

Furthermore, SMEs will get a new credit adjudicator service to fast-track their credit complaints and examine lending decisions to see if they are fair. Admirable indeed, but how long will the process take when businesses need quick credit?

Loan-back facility

An answer may lie in the SSAS loanback facility. Up to 50% of the SSAS fund can be lent to the sponsoring employer; a feature not available to SIPPs. Take a situation where four company directors each have their own SIPP worth £500,000. If instead they had a SSAS, under which they are all members and trustees, having a total value of £2m, they could make available a £1m loan to their company.

What’s more, the loan interest, which is an allowable business expense for tax purposes, is paid back into their own pension rather than to a bank and needs only be set at 1% above base; very competitive! They could also choose to set a higher rate to give a better return on their investment although there are other conditions such as a maximum term of five years and security for the loan. Overall, however, the SSAS puts the directors in control of their own credit facilities.

It is interesting to see many pundits and even political parties advocating that pension funds should be made accessible for use pre-retirement and yet that facility already exists to a degree through SSAS loanbacks.

Accessibility

This point about accessibility can also help overcome the business owner’s perception that once money has been paid into a pension it is locked away, perhaps preferring to keep the money in the business rather than pay into a pension. Yet keeping capital in a business is potentially subjecting it to corporation tax as opposed to pension contributions that save it.

Furthermore, as well as a company making corporation tax savings on pension contributions, the money that can be loaned back could be used by the company to purchase plant and machinery, thus taking advantage of the increase from £50,000 to £100,000 in annual investment allowance; double tax relief!

Tax breaks are always worth looking at. The Budget yielded a reduction in business rates from October this year and businesses could consider utilising that saving to boost contributions to their SSAS.

It should be remembered that the assets in the SSAS are ordinarily out of the grasp of creditors should the business fail, and yet remain under the control of the directors as members and trustees of the scheme; a good point to raise in the argument against that old excuse of “my business is my pension”.

I could continue to extol the virtues of how an SSAS can release capital to a business by purchasing commercial property it currently owns, or purchasing new commercial premises so that rent is paid to the director’s SSAS rather than a third-party landlord; how much better it is to hold assets like commercial property under the SSAS common trust structure rather than via individual SIPPs. This is especially so for family businesses where the assets are to be held for successive generations.

I could also go into the often favourable cost comparison between one set of charges for operating an SSAS compared with that of, say, four separate SIPPs, not to mention the issue of just how much more additional control and flexibility SSASs offer directors than SIPPs.

However, that could border on turning an article into a training session. Although SSASs have been spurned by some, there is still plenty of support for advisers from specialist SSAS administrators whose business is predicated on service.