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Understanding Small Self-Administered Pension Schemes

A little-known pension scheme option tailored specifically to small companies with limited staff is known as the small self-administered pension scheme (SSAS). The SSAS is a defined contribution pension run entirely independently by the company that establishes it. There is no need for interaction between pension trustees and insurance companies or banks.

The SSAS pension really began coming into its own in 2004 when the government implemented purposeful pension reforms designed to simplify a system that had become far too complex. Establishment of the programme allowed organisations that were not limited companies – like partnerships and family-run businesses – to create pension plans with the same tax benefits afforded regular workplace pensions. The SSAS has evolved quite a bit since then.

As the Pensions Advisory Service explains, SSAS schemes are generally the domain of small companies seeking to provide pension benefits to company directors, senior staff, and family members. The company may have no more than 12 employees enrolled in an SSAS, and only one SSAS per company is allowed. That pension can remain in existence even if the company that originally founded it goes out of business.

SSAS and SIPP Differences

There is often confusion between small self-administered pension schemes and self-invested personal pensions (SIPPs). Much of that confusion is due to the terms 'self-administered' and 'self-invested'. Understanding the difference comes down to understanding administration and investment. The two pensions are entirely separate because of this distinction.

Administration of a pension involves the routine tasks associated with ensuring the scheme meets the needs of members and complies with the law. Investing in a pension has to do with individual members contributing funds that are invested on their behalf by the administrator. That means the SSAS pension relates to the company establishing it while the SIPP is the domain of an individual investor who purchases it.

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How SSAS Pensions Are Structured

An SSAS pension can be established through an insurance company or bank, although this is not a requirement. Whether a third-party provider is involved or not, all of the assets of the pension scheme are held in the names of the scheme's trustees rather than individual pots being established for each member. Individual members are granted ownership of a certain percentage of the scheme according to their contributions.

Prior to 2004, an SSAS pension had to appoint a pension trustee who was usually a professional with extensive experience in pension investment. While this is no longer required by law, it is not uncommon for companies to continue operating this way for their own protection. If a pension trustee is appointed, that individual handles all of the administrative duties of the pension. If a company decides to go without a designated pension trustee, all of the trustees of the scheme are involved in administrative decisions.

Administering an SSAS pension without a designated trustee is not necessarily complicated, but there are certain requirements. First is that all decisions must be unanimous before they can be implemented, to avoid lack of compliance with Department of Work and Pensions legislation. Should one member of the pension scheme decide to leave, the assets of the scheme can be used to buy out that individual's interests, either by liquidating or using assets as collateral for loans.

Benefits of the SSAS Pension Scheme

Small self-administered pension schemes are very attractive to small companies because of the many benefits they offer. Right from the start, an SSAS may be the only way some small companies can afford to offer pension benefits to company directors and senior staff. Additional benefits include:

  • Creditor Protection – All of the assets in an SSAS scheme are property of the scheme rather than individuals or companies. Therefore, they are protected from personal and company creditors.
  • Investment Options – Unlike SIPPs and other forms of personal pensions, there are virtually no limits on the types of investments SSAS trustees can invest in.
  • Commercial Financing – One extra benefit exclusive to the SSAS pension is the ability to make commercial loans. For example, the scheme could provide a loan to the company for the purposes of buying a new building. The building would belong to the scheme but it would be rented to the business. Rental payments would essentially repay the loan and generate profit for the scheme.
  • Commercial Property – Although SIPP rules have changed to allow the holding of property, small self-administered pension schemes have a lot more latitude in property investing. For example, SSAS schemes can borrow up to 45% of their assets to purchase commercial property.
  • Tax Advantages – Both pension members and employers can contribute to SSAS schemes; both benefit from tax relief for doing so. This is especially attractive to company directors and senior management who may choose to reduce their total tax liability through pension contributions.

With the many benefits of the SSAS pension comes a lot of responsibility. Trustees must make very wise decisions to protect the contributions of members in both the short and long terms. Poor investment choices could lead to the total collapse of a scheme and the loss of all assets.

Choosing Between an SSAS or SIPP

SSAS and SIPP pensions both have their advantages and disadvantages. The question for every small business is one of which option is better. As for the answer, much of it depends on individual circumstances. Before a company chooses between the two, multiple things have to be considered:

  • Administration – By default, the SSAS is administered by its trustees. Usually, this means company directors. If those directors are uncomfortable or lack the knowledge necessary to administer the pension scheme wisely, a SIPP might be the better option. SIPPs are administered by third-party providers or trusts.
  • Costs – Every pension scheme involves certain costs related to establishing and administering it. How much a small business can afford to spend on administration will play a significant role in the type of scheme chosen. The SSAS is typically more expensive to set up but over time, less expensive to administer. Think of it as a 'pay me now or pay me later' scenario.
  • Loan Facilities – The fact that the SSAS provides built-in loan facilities for small businesses may be an important factor. Does the company setting up the pension plan to utilise commercial financing in the future? Will the company purchase property? Being able to loan a small business money from its own pension scheme not only eliminates some of the need for commercial financing, but it also enables the company to generate profit for the scheme with very little effort.
  • Pension Eligibility – Because the SSAS is limited to a maximum of 12 members, it may not be appropriate for small businesses with more employees. Companies have to weigh the benefits of setting up both an SSAS and a secondary pension option for other employees against establishing a single workplace pension to cover everyone.

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If your small business has 12 or fewer employees in need of pension enrolment, you might want to look at small self-administered pension schemes. This may be the solution you are looking for. If not, you also have the option of looking into a SIPP or taking advantage of the affordable NEST programme set up by the government to facilitate auto-enrolment. At any rate, make sure you are offering your employees the pension investing opportunities they deserve through a plan that is good for the long-term health of your company.

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