Small self-administered scheme (SSAS) is, put simply, is a brilliant pension product. Okay, I am perhaps slightly biased, but it does offer a level of versatility for business owners that is unrivalled by other pension products – SSAS has the ability to lend money from the pension scheme to the sponsoring employer.
A SSAS is an occupational pension arrangement typically setup by a limited company (the “sponsoring employer”) for its directors and senior employees. SSASs are registered with HM Revenue and Customs (HMRC) as standalone pension trusts that can make investments such as commercial property and land or make loans on behalf of the scheme members.
Although SSAS is broadly governed by the same laws as self-invested personal pension (SIPP), one of the key fundamental differences is that only a SSAS can agree a loan between the scheme and sponsoring employer.
As is the case with pensions, there are strict rules governing SSAS loans, and these must be adhered to or there are severe HMRC tax penalties.
These rules are:
- The maximum loan is limited to 50% of the SSAS scheme value
- Maximum term of five years
- Must be setup on a first charge secured basis
- Must be repaid in equal instalments of capital and interest, at least annually
- Interest must be paid least 1% over a prescribed rate which generally equates to BoE base rate.
Clearly, a loan at a rate of (at the time of writing) 1.75% per annum for the five year term, is exceptional. That said, this must be weighed against the return on the investment for the SSAS.
Planned interest rate hikes, Brexit, market uncertainty from trade wars and protectionism create an uncertain backdrop for interest rates. In many cases bank loan rates have increased, and often the ‘approval’ process is time consuming.
This is why SSAS is so brilliant. Your clients can access low cost borrowing to support their business and the interest is being paid into their pension, as opposed to the bank.
Case study
ABC Tools Ltd has been expanding rapidly and the directors need a short term cash injection to purchase more stock. They have £200k between them in existing pension assets.
Fact finding and advice process
- Firstly, identify how much cash injection the company needs. In this example, £100k
- Identify if the company (or members) has any assets that could be used as first charge security for a loan
- Set up a new SSAS and register with HMRC, sponsored by the Ltd company
- Transfer in the existing pensions to the SSAS bank account
- SSAS agrees to lend up to 50% of its £200k of assets to the company
- Company repays loan on a capital & interest basis (maximum 5 year term)
Benefits
This option allows the company to expand and continue growth whilst keeping the lending costs as low as possible – the rate of the loan could be just 1.75%.
They can also pay the loan off early with no penalties incurred and there is no “bank decision” process – if it meets HMRC rules, it is acceptable.
Considerations
SSASs can only make loans to connected employers that sponsor or participate in the SSAS.
In addition, the company would have to offer first charge security against the loan and this is often the property from which they trade, meaning the company would not be able to use the property for other borrowing.
Who should we turn to for support on this?
The SSAS market has a variety of providers, with costs ranging from cheap-as-chips to robust (time-cost charging is prevalent at the top-end and will usually prove very expensive). Usually ‘you get what you pay for’, but a fully supportive technically competent provider is crucial.
Good, supportive providers will be able to take on ‘scheme administrator’ responsibilities. This means you can guarantee that the complex rules and legislation governing pension schemes are strictly adhered to, thus avoiding problematic and costly tax penalties.
Matthew Storey is business development manager at Xafinity SIPP & SSAS