COVID-19 has seen many companies come up against unprecedented challenges. This has, in turn, seen financial solutions used in new, unexpected ways to solve key business issues. One prime example is the huge increase in popularity that small, self-administered pension schemes (SSASs) have enjoyed in the past few months.
A number of key SSAS providers reported a surge in SSAS registrations in April 2020 and specialists believe that it’s down to the SSASs unique loanback feature. A SSAS can authorise loan finance back to the sponsoring employer of up to half the value of the SSAS, i.e. the total amount of cash held and the net market value of the scheme’s assets.
This gives trustees the freedom to use the funds to fulfil key business goals. With SSAS borrowing rates currently highly competitive, this remains an attractive option for those businesses needing a cash injection during turbulent times.
Potential Risk Factors
It should be noted that the loanback feature is just one element of a SSAS – albeit an attractive one – and that all aspects of the SSAS should be considered with the help of an expert adviser before making a decision about its suitability for your unique situation and financial ambitions.
For example, if you have another form of collateral in your SSAS such as properties or assets, then the loanback feature may be an effective route to take. But this feature must be utilised properly in order to ensure that it represents a sound investment for the overall pension scheme and does not risk using your pension money inefficiently. In some cases, it may be more suitable to leave SSAS funds untouched and save for retirement as intended, instead choosing to fulfil business goals using alternative financial routes such as a bank loan.
The COVID-19 impact
Using pension scheme assets to support the business via loanback can be highly effective and the SSAS structure is highly sought-after in part for the control if affords member trustees over their retirement income. While the loan cannot be used to save the business from going under, it will prove a valuable cost-efficient way to fund ongoing business growth and provide liquidity during these unstable economic times.
In addition, when a loanback takes place the company is required to pay interest to the SSAS, providing further benefits in the form of these interest payments, representing a cost-effective source of capital.
This is especially pertinent due to the current economic situation and the threats to pension savings. As reported in Elite Business Magazine, “interest rate cuts and new government-backed bond-buying programmes have reduced the income pension funds earn from their fixed-income investments.” This low-yielding environment means that regularly re-evaluating pension arrangements with your financial adviser and negotiating the most effective outcomes is even more important.
One in 10 UK workers have paused their pension contributions since the onset of the pandemic due to the financial pressure of essential spending and the impact of furlough or redundancy. Any break in pension contributions can hit the long-term pension pot hard, and it is essential to keep long-term pension value and saving adequate retirement provisions as key priorities. This means we all need to leverage the best opportunities available to take control of our retirement income.
The Finer Details
If you are considering taking out a loan using your SSAS, we recommend taking expert financial advice to ensure that all the necessary admin is complete. One key box to tick is ensuring that the loan qualifies as a loan and is a fully authorised payment, otherwise you risk exposing yourself to tax charges. It’s also important to be aware of the factors it must fulfil to qualify as an authorised loan, such as interest rates of at least 1 per cent above the current bank base rate. Sound financial advice will ensure that you are fully aware of all the possibilities and the risks associated with your decision.
For more information about any of the above and a full explanation on how the SSAS loanback feature works, contact our expert practitioners today.
Understanding the fundamentals of financial planning is essential for making informed decisions about how to manage, save and invest money in preparation for retirement. When it comes to companies, making the right decision about your pension scheme could translate to significant cost savings, chiefly in the form of tax relief as well as other key benefits.
Small self-administered schemes (SSASs) are a special type of occupational pension scheme. They are set up under trust by a company and offer a range of unique benefits. Each SSAS has no more than 11 members, usually the company’s directors and/or senior staff members. The scheme can also be open to other employees, including family members who work for the company. Contributions are normally made by the company but may also be made by the individual members with ample tax relief opportunities available.
Designed predominantly for private and family-owned businesses whose directors wish to take more control over investment decisions and use their pension fund to invest back into their business, the members’ pension funds can be pooled. Each member has a share of the SSAS fund based on the contributions/transfer paid in for them, allowing them to share in the fund’s investment growth or loss.
Versatility and Investment Opportunities
While a SSAS offers all the benefits and tax advantages of a traditional pension scheme, it is especially attractive for its additional flexibility. Every member is also a trustee, allowing them to collectively manage the investment policy and key assets. This structure provides access to a wide range of investment opportunities with the possibility for higher returns, albeit with more risk, than more mainstream products.
Common investment options include listed stocks and shares, including overseas equities, shares in investment trusts and FCA-recognised offshore funds. With investment income and capital gains generally exempt from UK income tax and capital gains tax, this means even more benefits for members.
SSASs are also renowned for their tax efficiency where employer and member contributions usually qualify for tax relief. When it comes to taking retirement benefits, members can take out a tax-free lump sum, typically up to 25% of the member’s share of the SSAS fund although this will be subject to various conditions.
In addition to reducing corporation tax, employer contributions to a SSAS can be lent back to the business, and SSAS and administration fees can be treated as an allowable expense.
Investing in commercial property that is let to the employer is a very popular way that SSAS members can enjoy all the benefits of a SSAS whilst at the same time helping the business. And a SSAS can borrow up 50% of the scheme’s total net value to help fund the property purchase. No tax is payable in the SSAS on the property’s rental income and capital growth and any mortgage repayments would normally be met by the rental income that is paid into the SSAS.
Making the Most of your SSAS
One key point to remember is that the SSAS is controlled by the trustees of the scheme who are also the members of the SSAS. SSASs have made the headlines in recent weeks as advisers have reportedly been encouraging their clients to switch advisers in order to save on charges and ensure that they are receiving the most cost-effective service. With so many businesses taking a thorough cost review in the wake of COVID-19, it comes as no surprise that many SSAS advisers have seen not only an increase in takeovers but also in the formation of new schemes.
Companies are recognising how to utilise and maximise their pension fund in order to benefit the business. In line with this development, the number of switches (i.e. changing the SSAS adviser) has risen significantly – some adviser firms have seen as much as a 20% increase as clients seek to ensure they are gaining the best value for money.
In addition, a “lack of flexibility from legacy providers” has been suggested as another key reason for the increase in transfers, as clients are seeking out advisers who can offer both advanced technology and competitive prices. While the cost of running a SSAS will vary, it depends heavily on the complexity of the scheme in terms of members, benefits and range of investments.
Unique Service Offering
Transferring SSAS advisers can be complex and may mean re-registering the investments if the previous adviser was appointed as trustee. This makes the switch an even more important decision. Back in 2006, a key change was made to the SSAS regulations when the requirement for SSASs to have a professional trustee was removed. Our team at Vintage SSAS Services offer a uniquely flexible service in comparison to many other SSAS advisers as we give clients the option not to appoint us as trustee.
Whilst this is appropriate for some SSAS clients, others prefer to avoid the additional responsibility and stress of the role and choose to appoint a professional trustee. We are expertly qualified to act in the position of independent trustee but we understand that this is not always the route that clients wish to take, which is why we let our clients make the ultimate decision. For guidance and further advice, get in touch today.