This week I thought I’d give some love to another type of pension scheme which tends to fly under the radar – alongside the AVC pension which I recently created a separate guide for.
It’s known as a SSAS pension, and it’s rarely talked about. But for those who can make use of it, it has some juicy benefits over a regular pension, including some significant tax benefits.
And aren’t tax benefits the best kind of benefits?
What is a SSAS pension?
SSAS stands for ‘Small Self Administered Scheme’, and it’s a type of occupational defined contribution pension scheme.
A SSAS is set up by the directors of the company, mainly for two reasons: 1) to take advantage of the increased flexibility of allowable investments compared to a more traditional pension (like an occupational DC pension scheme or a SIPP), and 2) for the favourable tax treatment. Both of these are covered below.
Membership of the scheme is limited to no more than 11 members (hence the ‘small’ in SSAS), and the members are often company directors or senior executives, but they can be open to other employees and family members.
Each member usually becomes a trustee, and so has input over where to invest the money.
This is the main reason it’s so rarely discussed in personal finance circles – as you can imagine, due to the restriction on the number of members, these schemes are usually only appropriate for small businesses and start-ups.
Advantages of SSAS pensions
1) Wider range of investment options
SSAS pensions can invest in the usual assets eligible for pensions (funds/stocks/bonds), but in addition are permitted to invest in:
- Commercial Property
- Industrial / Retail Units
- Agricultural Land
- Commercial Land
- Loans to the Principal Employer
The SSAS’ ability to invest in commercial property is one of its main benefits, because it can include the company’s own property. The SSAS can buy the property, then lease it back to the members. This has the amazing benefit of being able to keep the business’ property within a tax-sheltered account, meaning there are no capital gains taxes to pay on the property’s sale.
Although it can purchase commercial property, the SSAS cannot purchase residential property. However, some exceptions to this ‘no residential property’ rule include purpose built commercial properties, with a residential element e.g. care homes, children’s homes, and student accommodation.
(NB: Not all SSAS providers will allow each of these options. It’s important to check the rules of your SSAS provider before setting it up.)
2) The SSAS can borrow and lend
A second benefit of a SSAS is its ability to borrow up to 50% of the scheme’s net assets, which can be used to buy property – either the entire property or a portion.
For example, the SSAS might borrow in the form of a mortgage, to purchase of the company’s premises. The mortgage repayments might then be covered, in all or in part, by the rental income the company pays the SSAS.
On the lending side, the SSAS can also lend money – up to 50% of the net value of the fund can be loaned.
For example, the SSAS is able to lend money back to the company and buy the company’s shares.
In terms of who it can lend to, the SSAS can loan to its sponsoring employer, or any party unconnected to the member (e.g. if it’s your firm’s SSAS, the firm or other external parties can receive the loan funds, but you personally can’t).
However, there are a few rules stipulated by HMRC governing the use of SSAS pension loans:
- The loan must be secured as a first charge on an asset of equal value to the capital and interest payable over the term.
- The loan must have a commercial interest rate (as prescribed by HMRC, typically at least 1% over bank base rates).
- The repayment period must not be longer than 5 years.
- The amount loaned must not be more than 50% of the net value of the scheme’s funds.
- Repayment of the loan must be in equal annual instalments of both capital and interest.
The chief benefit of using a SSAS pension wrapper to borrow/lend is that it’s beneficial for tax reasons. Borrowing and lending within a SSAS comes with tax advantages, as loan interest repayments are a deductible business expense, and loan interest received by the SSAS is not subject to tax.
3) Tax benefits
Although the first two benefits are also mainly tax benefits, it’s worth remembering that a SSAS is still a type of pension, so offers the same tax benefits as other occupational pension schemes. For member contributions, basic rate taxpayers get a 25% tax top up, while higher rate taxpayers can claim additional relief on their tax return. Contributions paid into the scheme by the employer also qualify for tax relief which can help reduce its total tax liability.
As it’s a pension scheme, the assets and investments within the scheme have no tax liability (i.e. are not subject to UK income tax and capital gains tax). This means any commercial property in the scheme – including the company’s own property – is exempt from capital gains tax on the final sale. In addition, any rent paid by tenants of the commercial property is free from income tax.
Should the SSAS members choose to use the SSAS wrapper for borrowing/lending, loan interest repayments (such as mortgage repayments) are a deductible business expense, and loan interest received by the SSAS is not subject to tax.
Disadvantages of SSAS pensions
1) Small membership
The main disadvantage of a SSAS is that no more than 11 members can join an SSAS pension scheme (in contrast to a regular occupational pension schemes which has no limit on the number of members).
2) Counts towards pension contribution allowance
Because it’s a type of pension, contributions to the SSAS (including those from a sponsoring employer) count towards your annual pension contribution allowance, which is currently £40,000 gross. Whether or not this is a disadvantage or not depends on whether you’re close to maxing out your pension allowance. Given the size of most people’s pension pots, which I looked at in this post on the average UK pension pots, this probably isn’t an issue for most investors.
3) Legal responsibilities
The members of the SSAS pension scheme are responsible for the adhering to the legal framework surrounding the management of the pension, ensuring the scheme is run in line with pension law.
This can be a large responsibility, given the headline figure for any pension transaction which breaches HMRC rules is a fine of 55% of that transaction.
4) Administrative duties
The trustees also have the added responsibility of handling all reporting to HMRC and arranging tax relief collection. However, it’s possible to appoint a scheme administrator to help with this.
SSAS case study
Let’s take a basic example, and say you and a business partner together own a small business which has used up its past tax allowances, and you’re now facing a corporation tax bill.
You have the choice of opening up a SSAS, and using the contributions to buy some equipment for the business and invest for retirement.
By setting up a SSAS and each contributing the maximum £40,000, as trustees of the scheme, you could lend £40,000 back to the company on commercial and secured terms, so the company can buy its new equipment. The remaining £40,000 can be invested in the pension wrapper.
This will reduce your corporation tax bill, leaving more profits retained by the business:
Using the SSAS pension results in an extra £15,200 retained by the business, and as an added benefit, the interest received on the loan in the SSAS wrapper isn’t subject to tax.
How do I set up a SSAS pension?
There are 10 steps to setting up a SSAS:
- Set up a limited company. The first step is to set up a limited company with Companies House. It costs £12 and can be paid by debit or credit card. Your company is usually registered within 24 hours.
- Designate scheme members. The members should be current employees or family members of current employees, with a maximum of 11.
- Appoint trustees. The trustees are the legal owners of the pension, and are responsible for the scheme’s day-to-day management. Usually all members are trustees – but they don’t have to be, especially if family members are included. You can find professional SSAS trustees who will work alongside you to set up the scheme, and who work with members to help comply with pension tax legislation. Trustees need to be over 18.
- Appoint scheme administrators. The scheme administrator is responsible for reporting to HMRC and ensuring legal compliance. The SSAS pension scheme administrator can be a member trustee or an appointed professional administrator.
- Authorise the scheme. Once appointed, the administrator will require the trustees to sign several documents, including a SSAS application form, trust deed and bank mandate. In addition, the scheme members have a legal obligation to comply with anti-money laundering legislation, so each member of the SSAS will need to have their identity verified.
- Register the scheme with HMRC. You’ll need to register your SSAS with HMRC before you can start to receive contributions from your members, and registration also ensures the scheme qualifies for tax relief. You’ll need the details of all trustees, as well as information on the company, including PAYE, company registration and VAT registration numbers. After the scheme is successfully registered, HMRC will provide a Pension Scheme Tax Reference (PSTR) number. This is a unique code made up of eight numbers followed by two letters, which verifies that your scheme has been registered for tax relief and exemptions.
- Open the scheme bank account. This will be the trustees’ account where all contributions from the scheme members are received and managed. You’ll need at least one designated bank account for the SSAS, however you can establish multiple bank accounts to serve different purposes, such as to receive contributions and to handle investment income.
- Register with The Pensions Regulator. Next, you’ll need to register with The Pensions Regulator. This is the regulator for work-based pensions.
- Transfer any existing pensions. Now the SSAS pension is set up, each member of the scheme neds to decide whether they’d like to transfer any or all of their existing pensions over to the new SSAS.
- Start contributing and investing. Scheme members and the sponsoring employer may begin contributing the scheme and receiving tax relief, with member and employee contributions being paid into the trustees’ bank account opened in step 7, and invested in line with the SSAS investment rules and regulations.
Hopefully this short guide has given you a good idea of whether a SSAS pension is right for you. If you have any questions, feel free to let me know in the comments.