I’ll stick my neck out on this and say that I don’t think there’s a better pension model for limited company directors (other senior members of the company and family members) than the Small Self-Administered Scheme – or SSAS. That’s why so many limited company directors are choosing this option and why some are exploring transferring their Self Invested Personal Pension – or SIPP – to an SSAS.
The first thing that limited company directors reading this should take on board is that the SSAS can be a highly tax efficient occupational pension scheme, which provides opportunities for investment in your company as the "sponsoring employer" as well as other opportunities for business investment, and provides a loan facility for your company and for other unconnected third parties. The pension model also allows passing on property and liquid assets to family members.
With the SSAS there is far more flexibility and control than with the SIPP. Even the small thing, like a contributing sponsoring employer being able to pay operational fees for the SSAS through the company and offset the expense against corporation tax is a great tax-saving strategy. And another thing to remember is that it is far, far more tax efficient for the company to be making pension contributions than it is to be taking income out of the company on an individual basis in order to put funds into another pension scheme, not least because income will incur national insurance whereas the pension contribution will not.
The SSAS in a nutshell:
- The SSAS comes with all the tax advantages of other government/pensions-regulator-approved pension schemes;
- An occupational pension scheme, the SSAS is a trust that is ring-fenced from the company and secured with its own bank account, and rigidlyprotected by pension regulation;
- The SSAS is a flexible structure that puts investors and “third parties” (e.g. connected family members or colleagues) in full control;
- It can provide loans for investment in the “sponsoring employer” (that’s your business – e.g. for plant, machinery, business premises, premises development – NOT fast cars, holidays in Panama …);
- Funds and assets can be earmarked and pooled as necessary or when desired;
- The SSAS can buy shares in any of the sponsoring companies up to 20% of the total fund;
- The SSAS can invest up to 5% of the scheme assets in shares of any sponsoring employer.
- Assets, liquid or property, can be passed on to other members of the SSAS who might be members’ children or spouse.
Contributions: The SSAS is an occupational pension scheme with a flexible structure in which the contributions are jointly held in trust along with other assets.
Annual allowance: As contributions don’t have to be earmarked at the time they are paid in, no assessment against the annual allowance is made until the funds are being allocated. This can be very tax efficient and provide flexibility of the allocation of assets.
Flipping: Asset allocation can change from pooled to earmarked or vice versa.
Fund manipulation: Members can decide on what they want to take out of the trust or pass on to another family member or colleague. It is the manipulation of the fund like this that makes for the reputation of flexibility for which the SSAS is well known.
Here’s a further a–d about the SSAS
- Contributions by the limited company in the SSAS do not have to match the salary of the member.
- In-specie contributions of an asset rather than cash can be paid to the SSAS.
- Should a company be wound up, the SSAS can still continue.
- A new sponsoring employer can join the scheme.
Loans to “sponsoring employers” and third parties / and purchase of shares
Business can take advantage of a rule that allows them to take a loan from pension assets; members of an SSAS can lend up to 50% of the money in the SSAS to the “sponsoring employer” (the company), just so long as it’s secured (security is often in the shape of commercial property). The SSAS can also make loans to unconnected parties:
And Investment options
- Up to 50% of the SSAS fund can be lent to a sponsoring company at 1% over bank base rate. A first legal charge over non-taxable property must be provided as security.
- Loans to unconnected parties can also be made on commercial terms and do not need to be secured.
And benefits for sponsoring employers: Shares and investments:
- The SSAS can spend up to 5% of its fund on shares in a contributing company
- Shares in any number of sponsoring companies can be purchased up to a total investment of 20% of the fund.
- Shares in unconnected trading companies can be purchased. The limit on the investment is 19% of the company which can be purchased between the SSAS, the individual members and any other connected parties.
- There is no limit on the percentage of the fund that can be spent on shares in unconnected companies.
- The SSAS can purchase up to 100% of an investment company where its sole asset(s) is an allowable pension investment such as commercial property or intellectual property
Investments that are NOT permitted include:
- Residential property
- Private company/unlisted shares
- Loans to the SSAS member or anyone connected to the member
- “Exotic” assets, including yachts, vintage cars, wine, stamps and art works
3. Pooling investments, and earmarking investments
The option to pool investments is central to the attractiveness of the SSAS. Let’s take an example: The SSAS can purchase the business premises, as it’s an allowable investment under the terms of the trust.
You and other trustees decide to transfer the business premises from ownership by the business, an individual, or another pension scheme such as a SIPP, to the SSAS, via what is known as an in-specie contribution/transfer.
Now that the trust owns the business premises it can be developed in the future, but meanwhile it is immediately helping to shore up the business and is a great investment for the future of your SSAS fund.
Other ways of making the most of the SSAS structure:
- As the SSAS is a tax-free environment, the trust can now capitalise on the “latent value” of commercial property by gaining planning permission or developing the site.
- And, your company will now pay rent to the SSAS as an allowable expense, this will be investing in your SSAS, which means your business and your SSAS are both quid’s in.
Corporation tax and in-specie contributions
Depending on the circumstances of the transfer, having moved the business premises to the SSAS via an in-specie contribution, this could remove all liability for corporation tax for your business in the year of the transaction if the contribution exceeds the company’s profit in that year. This could even be rolled back to the previous year to create a corporation tax refund. The transaction must be carried out to the letter, however, in order to avoid being taxed on the investment because you don’t meet the conditions. See the rules at HMRC.
For the time being the new purchase will be a pooled asset within the fund (a percentage of the total fund is owned by each member); but in future it might be earmarked (specific assets are notionally allocated to specific members) and in the future it could be passed on to children, who are also members of the SSAS fund.
There are three further BIG pluses under the pooling investments heading:
- Purchasing property through SSAS is a lot easier and cheaper than a group of individual SIPPs.
- Restructuring the percentage ownership between the members is a simple exercise that doesn’t involve an expensive legal process of ownership change.
- Non-employees with a relationship to members can join, thus pooled assets are a popular way to pass on property to family members.
Taking money out of the SSAS
And there’s even one more bonus, this time for personal tax: if the property is owned by the SSAS, the rent from it will not be taxed as it would if the property was owned by the company or a director of the company. The rent from the company to the SSAS, instead, will increase the members’ pension fund. At age 55 members can then draw the first 25% tax-free from the fund. The SSAS is win-win, but it needs very careful planning, administration, and tax-planning strategies behind it.
4. Passing investments down the generations
The SSAS assets such as property or unquoted shares can be handed down through the generations of a business or a family. It might not be appropriate to sell the premises or let go of assets so where a property is occupied by the company, for example, the premises can be handed down generation to generation or business owner to business owner.
Where a member wishes to retire or leave the pension scheme, this can be funded by cash which should have accumulated in the SSAS bank account or other liquid assets.
5. Other benefits for contributing / sponsoring employers
- A contributing employer can pay the operational fees for the SSAS;
- The fees are a deductible against Corporation Tax
- VAT to be reclaimed
Why not set up SSAS?
Are you tempted to find out more about setting up SSAS? Flexible, full control, secure and a great tax- and wealth-planning vehicle, which you can pass through generations, and importantly the all-important in specie loan facility and business growth aspect of SSAS.
Who should run your SSAS?
Unless you have professional knowledge of the UK tax system and the law you must hire a professional administrator, your accountant or another person professionally qualified. Running your own pension trust does involve annual reporting.