Avoiding A-Day trip ups

Mary Stewart warns of turbulent times ahead for SSAS if A-Day rule changes are not implemented

The clock is counting down on a pension rule change that could easily catch out members of small self administered schemes who chose – or were compelled – to use the A-Day reforms in 2006 to take control of their own administration.

By 5 April 2011 all SSASs are required to have adopted these A-Day rules.

Members of those schemes that have not could potentially face deregistration, tax charges or restrictions on the benefits that can be taken.

The change gives financial advisers who were involved in setting up SSASs for employers before A-Day, or those who have clients who are SSAS members, an opportunity to check with them that any problems have been averted. Enacting the changes takes just a few days, but identifying schemes and potentially rethinking the investment strategy which could include selling a commercial property already makes that deadline quite tight.

The majority of schemes will already have adopted the new rules. In advance of the changes coming, most SSAS administrators rewrote the scheme deeds and contacted the trustees to have them adopted at A-Day or shortly afterwards. But there are some scenarios where the adoption may not have happened and these cases – perhaps just a few hundred – are the cases advisers may be able to help identify for their clients.

Pensioneer trustees

Most obvious is the result of A-Day legislation which made it possible for the SSAS to dispense with the services of a pensioneer trustee, effectively the professional trustee whose role was to ensure the scheme complied with legislative requirements. Post A-Day it falls to the scheme administrator registered with HMRC to ensure compliance.

Some schemes were forced to go it alone as administrator or to appoint another because their existing provider chose to withdraw services, often to focus on growth in the SIPP market instead. More commonly, many schemes saw a chance to save on costs by doing their own administration, a decision that was often reversed later when they fully realised the complexity of the reporting requirements. Despite this, there will still be schemes even now where the trustees are responsible for doing their own administration and retain liability even where a practitioner is helping to run the scheme.

Other scenarios worth checking are where the IFA has worked with a client to buy a commercial property within the SSAS but where the scheme has been dormant since. Problems might only come to light after the deadline when a member starts to take benefits. There may also be cases where the directors of the company for some reason never got round to signing the deeds that formalise the new rules, either they have been shelved, ‘lost in the post’ or perhaps the employer has ceased trading (in this case the liquidator can sign the deeds).

Taking benefits

The issue focuses on the amount of benefits that can be taken from the scheme. Before A-Day SSAS scheme benefits were calculated with regard to the salary received by the members and time served. Typically directors would be paid in dividends and bonuses to mitigate tax but in the run up to retirement would increase their salary for just a few years, giving them scope to take the maximum possible from the SSAS.

Since A-Day the benefits calculation has changed with tax-free cash limited to 25% of the value of the individual member’s fund and the income dependent on tables produced by the Government Actuary’s Department. Lifetime allowance rules also impose a maximum fund size, although some SSAS members will have opted for primary or enhanced protection. In short, many members will be better off under the new rules but in the cases where they are not better off, the asset mix and investment strategy could be tweaked to optimise benefits that are available later.

Failing to adopt the new rules leads to several potential problems. The scheme could be deregistered, losing its tax privileges and leaving the trustees liable to tax charges of up to 40% of the scheme assets. Excessive member benefits could be subject to tax charges with members retiring under old rules forced to buy annuities rather than utilising unsecured or alternatively secured pensions. Contributions to the scheme may also be restricted.

‘Simplification’ was the catchphrase of the A-Day reforms but nearly five years on, some of the extra complexities introduced are still evident. Adopting the A-Day rules is a potential headache for trustees, but an opportunity for IFAs keen to show they have their fingers on the pulse.

Mary Stewart is director at Hornbuckle Mitchell