What is a Small Self-Administered Pension Scheme (SSAS)?

What is a Small Self-Administered Pension Scheme (SSAS)?

What is a SSAS pension?

SSAS stands for 'Small Self-Administered Scheme' and they are a defined contribution pension that employers can self-administer. SSAS Pensions are set up by company directors to give them greater levels of control over how their pensions are invested.

SSAS Pensions are classified as workplace pensions that can be independently managed by the trustees that set them up and they don’t require any interaction with the typical financial institutions or insurance companies that usually manage pensions schemes, offering complete control and flexibility. That being said, some institutions do actually offer SSAS Pensions. The benefit of this independence is that the members of the SSAS can select from many types of investments to hold in the pension.

One of the most popular strategies for a SSAS Pension is for a company’s owners to purchase the property they trade from in a SSAS Pension and lease the premises back to their company.

How does a SSAS Pension work?

The typical aim of a SSAS Pension scheme, like other pension schemes, is to build a retirement fund for the members of the scheme. Although SSAS Pensions are classified as an employer-sponsored, defined contribution pensions scheme, membership is not limited to company directors as other employees and even family members are able to join, on the basis that there are no more than 11 members of the scheme. The scheme members are often company directors or senior executives however, they can be open to other workers and even family members. All the SSAS assets are held in the name of the Trustees and the SSAS Pension’s rules (the legal document which governs how the scheme operates, alongside a trust deed) will establish whether each member of the scheme is allocated an ‘individual pot’ or whether the assets are pooled and each member is entitled to a proportion of the scheme’s assets.

The SSAS Pension fund is created by pension contributions made by either the members and/or the employer. The contributions made by individual members of the SSAS typically qualify for tax relief and the employer’s contributions are often deductible against profits. To build the initial capital in the SSAS Pension, it is often possible to transfer funds from existing pensions and it is also possible to transfer funds out of the SSAS Pension to other pension schemes.

Again, just with other defined contribution pension schemes, the value of a member’s retirement benefits from a SSAS Pension will depend on:

1. How much money has been paid into the SSAS on their behalf.

2. How long each contribution has been invested in the SSAS.

3. How much growth has been generated by the SSAS investments over time.

4. The charges incurred by the SSAS over time.

Again, as with other pensions, once members are 55 or older, they will be able to take out up to 25% of their investment pot as a tax-free lump sum and either leave the remainder in the fund to generate an income or draw down on the capital as part of a carefully considered programme to manage the longevity of the fund.

Are SSAS Pensions a good idea?

There are many reasons why SSAS Pensions are popular:

1. SSAS Pensions are flexible: The key benefit of SSAS pensions is that they offer a much greater degree of flexibility when it comes to how the fund’s money is invested, including individual commercial properties, shares in the company; and SSAS pensions may also be able to loan money to the company.

2. SSAS Pensions can borrow money: It is often possible for SSAS pensions to borrow money, often in the form of a mortgage to purchase property and, where a SSAS pension has been created to buy the company’s premises, the rent paid by the company will often cover all or part of the mortgage repayment. As a result, SSAS pensions are often used by business owners as an efficient way to extract additional cash from their businesses for use in retirement.

3. SSAS Pensions are tax-efficient: SSAS Pensions typically offer the same tax benefits as the more standard workplace pension scheme, in that members paying into the scheme will be able to claim tax relief on their contributions. Furthermore, assets held by the scheme don’t have any tax liability and commercial property, in particular, is exempt from capital gains tax when sold.

4. SSAS Pensions are cost-effective: Pensions schemes run by financial institutions may be subject to large fees and charges, however, SSAS pensions that are managed by the trustees of the scheme will be able to manage and control the running costs themselves.

5. SSAS Pensions can be used for wealth transfer: Family members can join SSAS Pensions and therefore these types of pensions are sometimes referred to as ‘family pensions’ for the reason that non-employees of the company can join. Equally, SSAS Pensions may be able to hold assets in trust after the original beneficiary has died and pay benefits to family members.

6. SSAS Pensions are secure: SSAS Pensions are no different to other types of pension schemes in that they are protected from both creditors of the company and any personal creditors of the members.

There are of course some downsides to SSAS Pensions:

1. SSAS Pensions have a small membership: Currently, SSAS Pensions cannot have any more than 11 members of the scheme. This makes them great for small and medium-sized businesses, however, the scheme typically won’t work for larger companies.

2. SSAS Pensions have increased legal and administrative responsibilities: With SSAS Pensions the members, acting as trustees, must carry the legal responsibilities of running the scheme and the associated administrations such as reporting to HMRC and collecting tax relief.

3. SSAS Pensions can be less liquid: When the bulk of the pension’s assets are a commercial property, this can make taking money out of the pension (for example, when wanting to access the 25% cash sum at retirement) much trickier as the property would need to be sold if a large amount of capital needed to be raised.

What is the difference between a SSAS and a SIPP?

SSAS Pensions and SIPPs both give members an increased level of control and flexibility over how their funds are invested, the main difference is SSAS Pensions are for companies and SIPPS are for individuals. To expand on this, the entire pension pot belongs to an individual in a SIPP, whereas with SSAS Pensions, the entire fund is shared by the members of the scheme.

Conclusion.

As you can see, SSAS Pensions offer a greater level of flexibility to smaller business owners, enabling them to invest in a broader range of investments than more typical workplace pensions. Furthermore, they allow family members to benefit from the scheme, allow the passing on of family wealth and protect assets from creditors. However, they do come with a greater level of legal responsibility and administration when compared to standard workplace pensions.

What’s next?

If you need help or advice on your personal or business finances, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Well, we advise clients across the UK.

Don’t forget, this article offers information about pensions and tax and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.