A simple SSAS – how it can work for a family and their business
It is a common misconception that SSASs are established just to facilitate a loan to the employer or to acquire a commercial property. Agreed that was a big driver in the good old days but now a SSAS with a competitive fee structure and modern online functionality can help clients in a wide variety of scenarios. Here is one such scenario:
Mum and Dad
Charlie and Julie run a successful engineering business. Their company has been trading profitably for several years and their accountant has been trying to get them to consider corporation tax planning for a while now.
When it comes to pension planning, they both have been contributing to a Group Personal Pension together with their staff but have very little interest in pensions like most normal people. They are very busy with the day job of running a successful business and view pensions as a “rainy day” subject that they will get to later.
The company does not need a loan and they are happy with their current company premises. Charlie and Julie are both in their late 50s and at a planning meeting with their professional advisers some thoughts and concerns for the future were discussed:
- Their business is profitable, and projections look positive for future years, so corporation tax planning is now essential.
- While they have no interest in esoteric assets or property, they would like more flexibility and control of how their pension funds are invested and managed.
- Their children Michael and Becky work in the business, and they are concerned about pension planning for them.
- Although in good health Charlie and Julie would like their pension scheme to have maximum flexibility in the event of their deaths and wherever possible include their children in planning for the future.
The Plan
With help from the family’s accountant and financial planner the concept of a SSAS is discussed. The family like the idea of being a trustee and in control of the investment decisions and having the option to include family in the membership of the Scheme.
The decision is made for the company to establish a Morhart SSAS and invite Charlie, Julie, Michael, and Becky to join. Once registered with HMRC the plan for the SSAS is:
- To make use of carry forward rules and make an initial employer contribution of £250,000, thereby making a significant reduction to the company’s corporation tax bill. All four members play vital roles in the success of the business and the company accountant is comfortable with this level of contribution.
- Old insured pension arrangements belonging to Charlie are transferred to the SSAS with an approximate value of £75,000. Charlie is salaried and employed by the Principal Employer of the SSAS, so this meets HMRC requirements, and we are able to process the transfer.
- Future employer contributions are planned at approximately £50,000 p.a., lifetime allowance (see below) and other planning issues will be addressed at review meetings with the family’s financial planner.
- The family’s financial planner invites investment managers to meet with the family and introduce how they could build a discretionary portfolio for the SSAS.
- Detailed death benefit nomination forms are completed as part of the SSAS establishment for all four members. Mum and Dad are very keen for any funds from their death to remain in the SSAS for future pension savings for Michael and Becky.
- A decision will be made in the future on inviting new members to the SSAS. With membership being discretionary this could be used to incentivise key senior employees.
Things to consider
Annual Allowance
The current annual allowance is £60,000 p.a. for each member, this means that the maximum each member can pay (or have paid on their behalf in the case of employer contributions) is £60,000 before the excess gets taxed.
Gone are the days of an allowance of £255,000 p.a. per individual however with a 4 membered SSAS the company can pay as much as £240,000 p.a. to a SSAS which could provide a significant saving in corporation tax. As mentioned above it is also possible to take advantage of carry-forward rules which effectively means you can mop up any annual allowance you have not made used over the previous 3 years.
Contributions need to be wholly and exclusively for the purposes of the business.
Lifetime Allowance
Once in the SSAS, all investment growth is tax-free however, there is a threshold on the total amount of private pensions a client can save, known as the lifetime allowance (LTA). This currently stands at £1,073,100 per member and is compared to the value of the pensions at certain events, for example when the retirement benefits come into payment.
However, following the March 2023 budget, it has been confirmed that the LTA tax charge will not apply in the 2024 tax year and the LTA will be scrapped altogether from 6th April 2024. Whether future Governments maintain, change or U-turn on this legislation is a question that clearly remains unanswerable at this stage.
Death Benefits
A SSAS has the ability for pensions to be paid directly from the assets, as opposed to being purchased through an annuity. This is known as income drawdown and provides additional flexibility such as the ability for funds to be inherited down to the next generation. As a SSAS is a discretionary trust no inheritance tax is payable.
As an example, in the event of Charlie or Julie’s death, their funds can remain in the SSAS and either be used to provide benefits for the surviving spouse or can even remain in SSAS, continue to grow, and be used to provide an income for Michael or Becky either now or at some point in the future. This flexibility allows the potential for planning on the family’s overall financial position in the event of something unforeseen, such as a death.
Benefits are paid tax-free in the event of the member’s death prior to their 75th birthday, they are taxed at the beneficiary’s marginal rate, in the event of death after age 75.
Fund Split
A SSAS is a global fund which means that each member will own a percentage of the entire value of the SSAS, as opposed to everyone owning specific assets. The percentage is dependent on the level of funds which have been paid into the SSAS (for example contributions and transfers), the length of time they have been in the SSAS, and the level of funds which have been paid out of the SSAS (for example pension payments).
As mentioned above it is therefore possible for the SSAS to have one investment, such as a discretionary investment portfolio for multiple members of one SSAS. The value of the portfolio will then be divided as a percentage for each member.
It needs to be borne in mind that liquidity may be needed in certain events, for example, a death, divorce, or a transfer out.
Cost
As a SSAS is one pension scheme, it can be a cost-effective vehicle for pension provision, particularly for families. For Charlie, Julie, Michael, and Becky, they will be paying for one pension scheme to look after their pension provision, as opposed to paying for four individual pension schemes.
Potential for other members
A SSAS can have up to 11 members. Once established it is possible for the directors to invite other employees, usually senior employees, to join the SSAS. Contributions can then be paid, and they will enjoy the benefits of the SSAS, like the family members.
The Results
Contribution and pension transfers are received, and the funds are invested in a discretionary investment portfolio. All four members like the fact that the portfolio is bespoke to their circumstances and views on key issues such as the environment.
In this scenario the Morhart SSAS has delivered the following for the clients and the business:
- A bespoke family pension arrangement.
- Significant corporation tax savings for the company.
- A good understanding of what Charlie and Julie want to happen in the event of their death with the right pension structure in place to make this happen.
- Control of pension scheme investment that the member trustees can influence along with their professional advisers.
With an annual administration fee of £1,000 + VAT the above results have been delivered at a cost that is on par or cheaper than the alternative of four SIPPs. Also, fees can be paid by the company meaning that reduction in yield (RIY) is not an issue and fees are an allowable business expense.
The author
Steve Hart
Steve is a director of Morhart Pension Services Ltd.
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0117 457 7784
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