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J.S.P. Financial Services Limited

INDEPENDENT FINANCIAL ADVICE SERVICE

 

E-mail: jspfs@tiscali.co.uk;  Website: www.jspfinancial.co.uk

Authorised and regulated by the Financial Conduct Authority

Registered Office: Delta View, 2309-2311 Coventry Road, Sheldon, Birmingham, B26 3PG; Registered in England No 2645833

 

  

 

      

                                     A Guide To

                       Small Self Administered

                        Pension Schemes (SSAS)

 

 

 

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Introduction

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A Small Self-Administered Scheme is a pension arrangement which allows company directors to maintain control of their pension investments in a flexible and tax efficient environment.

Such schemes are ideally suited for shareholding directors of small to medium sized limited companies.

They are similar to SIPPs (Self Invested Personal Pensions), although do not require a third party provider - your Company sponsors the Scheme instead.

The Scheme is governed by a Trust Deed and Rules and is a separate legal entity from the sponsoring Company and is run by its Trustees, who are usually the Directors.

Company contributions can be varied in line with profitability and there is no contractual commitment to pay any particular level of contribution.

How Are Contributions Invested?

 The Trustees can invest the Scheme assets in a wide range of areas  including:

  •  Conventional assets such as cash deposits, quoted and unquoted shares, fixed interest stocks, and unitised funds
  • Commercial land and property, assisted by external borrowing if required, to lease to the Company or a third party
  • Secured loans to the Company on commercial terms for the purpose of its trade

The Taxation Benefits

  • Contributions paid by your Company are allowable as an expense against corporation tax
  • Investments accumulate free of income and Capital Gains Tax (CGT)
  • A percentage of the fund can be paid out as a tax free lump sum on retirement
  • Potentially all of the fund is available on death

Flexibility and control can be maintained even beyond retirement and sale of the Company, as pensions can be paid out of the accumulated Scheme assets.

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Contributions

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You do not have to commit to a minimum contribution - the Company can vary the contributions in line with profitability.

 Company contributions can be an allowable expense for corporation tax purposes 

Company contributions are not assessed to income tax on any contributions paid by the Company.

Members can pay personal contributions and obtain tax relief although this is unusual for this type of Scheme.

The maximum tax efficient contribution level for members is £40,000 p.a. (though you may be able to carry forward three prior years of unused contribution levels) and some restrictions may apply.

Contributions can be paid in the form of contributions by the Company, or as "in-specie" contributions such as shares or property.

Lifetime Allowance

The Revenue set a Lifetime Allowance on the total retirement benefits you can receive from all your pension plans without a tax penalty. 

If your benefits exceed this allowance, there is a Lifetime Allowance charge of 55% on the excess if it is paid as a lump sum, and 25% if taken as a pension. 

Your benefits must be tested against the Lifetime Allowance before your 75th birthday. 

The Lifetime Allowance is currently £1,000,000 unless you applied and qualified for one of the various Lifetime Allowance Protections where available.

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Permitted Investments

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SSASs have been designed to allow maximum flexibility with regard to your choice of investment strategy and the Trustees will be the legal owners of all assets held within your fund.

Your SSAS can be invested in any of the following ways:

  • Unlisted shares
  • UK quoted stocks, shares, gilts and debentures
  • Shares quoted on the Alternative Investment Market (AIM)
  • Warrants, Futures and Options
  • Permanent Interest Bearing shares
  • Stocks and shares traded on a recognised overseas stock exchange
  • Authorised unit trusts, investment trusts and OEICS
  • Insurance company funds
  • Deposit accounts
  • Commercial property and land
  • Hedge funds

Certain categories of investment may result in tax charges. These include: 

  • Residential property and associated land from which you derive personal benefit 
  • Personal chattels (capable of private use) 
  • Loans to connected parties such as Scheme Members, their relatives and partnerships in which they are partners

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Commercial Land and Property

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The Trustees can invest tax efficiently in commercial land and property.

Land and property can be purchased from and/or leased back to the Company. An independent professional valuation must be obtained to ensure that the transaction is on a commercial basis.

The purchase of commercial property is one of the main reasons for establishing a SSAS as the property is effectively purchased with funds that have enjoyed the benefit of tax relief.

Purchasing property from the Company can assist in raising funds for the Company whilst the Trustees retain control of the property. 

Any property held in the Scheme may be sheltered from creditors of the Company, and in an environment where all rental income and capital gains are free of tax. 

The Scheme Trustees may register for VAT. 

The Scheme may borrow money to assist in the purchase of the property – the maximum borrowing is 50% of the Scheme assets before the purchase. 

Joint purchases (with the Company or other third parties) can also be considered.

Main advantages of buying your property within your pension Scheme 

An initial saving in cost – in effect it costs less to buy a property if the purchase is via a pension fund as the contributions have attracted Corporation Tax relief – there is more cash available from your own resources 

Any gain on the property is free of CGT, the rental income is tax free and the company is eligible for Corporation Tax relief on the rent, so extremely tax efficient. 

As with an ordinary property purchase all of the normal procedures need to be undertaken such as instructing your Solicitor, instructing a Surveyor (who will also set the commercial rent to be paid to the SSAS by the Company), associated costs i.e. stamp duty etc, and the appropriate lease agreements with the Company.

 Your pension Scheme can register for VAT and you will need to speak to your Accountant with regard to this specialist area.

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Borrowing

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The Trustees can borrow funds to assist in the purchase of property or to create liquidity for the provision of retirement or death benefits. 

Trustee borrowing is restricted to 50% of the pension fund value before the purchase takes place, to include existing borrowing and any amount borrowed to finance VAT on the property purchase. 

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Loans

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The Trustees can lend money, up to 50% of the Scheme assets to the Company as long as the loan is to assist with the trade of the Company and is on commercial terms. 

The main criteria are: 

  • The loan must be documented for a fixed term, maximum 5 years 
  • The interest rate must be set at 1% above the average base-lending rate of the six main high street banks 
  • There must be security with a first charge over property that is at least equal to the value of the loan plus interest 
  • The loan must be repaid in equal instalments of capital and interest for each year of the loan 

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Unquoted Shares

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The Trustees can invest in unquoted company shares, although because of possible significant tax charges or complex restrictions imposed by HMRC, it is imperative to check the possible advantages of any proposed share purchase first with your Accountant and Solicitor. 

Your SSAS can invest in the shares of your Company - the Principal Employer or other associated employers - up to a limit of 5% of the fund value in any one such employer, and is limited to 20% or less of the fund value in all employers. 

This limit applies whether the Principal Employer is a Limited Company, Partnership or plc. Care needs to be taken when investing in the Principal Employer as any share purchase may result in the SSAS owning unauthorised assets i.e. HMRC deem ownership of office equipment or vehicles owned by the Company to be unauthorised and would result in a tax charge. 

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Connected Party Transactions

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Transactions between the Trustees and connected parties are now fully allowable provided they are on an 'arms-length' commercial basis, that is an appropriate independent valuation is undertaken. 

HMRC will be keen to ensure that no "value shifting" takes place, if it does HMRC will make a tax charge. 

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Payment of Benefits - Retirement

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There are a variety of benefit options available on retirement. 

You can draw benefits at any time from age 55. At this date you can use all or part of your fund to provide you with a tax free lump sum and an income. 

You can draw benefits from your Scheme irrespective of whether you continue to work. 

You can elect to receive a tax free lump sum of generally up to 25% of the value of your fund. 

The date you commence benefits is referred to as your crystallization date. You can have several crystallisation dates if you only take part of the fund each time. 

After payment of the tax free lump sum, your residual fund can be used to provide you with an income or lump sums that will be taxed under Schedule E and this income can be provided in one of three broad ways: 

Annuity Purchase 

Income Drawdown 

Phased Retirement 

Further details are available. 

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Payment Of Benefits - Death

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Death before Pension Date 

In the event of death before pension date the full value of the fund (subject to the restriction below and reaching age 75) can be paid to your nominated beneficiaries. 

The benefits on death are normally written under discretionary trust and therefore any lump sum payments should not be subject to Inheritance Tax (IHT). 

Death after Pension Date 

On death after pension date and after an annuity has been purchased, the benefits payable will be determined by the terms of the annuity contract. 

If death occurs during Income Drawdown then the value of the fund may be paid to your spouse, dependent or your nominated beneficiaries. The amount will be tax free on death before age 75, otherwise subject to the beneficiary's marginal tax rate. 

A spouse or dependent entitled to a pension may elect to continue to take Income Drawdown rather than purchase an annuity. 

In the event of the death of a spouse or dependent during Income Drawdown, the whole value of the fund can be paid to nominated beneficiaries, subject to the beneficiary's marginal tax rate if death occurs after age 75.

Free Consultation

You can have a free initial consultation. There's no fee, no catch and no obligation on your part. 

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