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Beware inadvertent misuse of a SSAS

SSAS are ever more popular but advisers must be wary of them being inadvertently misused within multi-member schemes, says Martin Tilley, director of Technical Services, Dentons Pension Management

Several operators of Small Self-Administered Schemes (SSAS), including ourselves, have reported an increase in the vehicle’s popularity over the last 12 months.

There are good reasons for this. SSAS can operate exactly the same flexibilities as all other registered pension schemes and can also offer a wide range of investment flexibility.

In addition to the more widely used bespoke SIPP vehicle, they can lend money to a founder or associated employer subject to HMRC’s five key criteria concerning the amount, term, interest rate, repayment terms and security. In addition, a SSAS can allow the cascading of investments down a generation, which can be particularly useful for a family run business where the SSAS holds the company’s trading property.

However, other commentators have raised concern that SSAS’s are regaining popularity for the wrong reasons and as they would appear to be less tightly regulated than SIPPs, could be open to abuse or misuse.

The Financial Conduct Authority (FCA) have introduced very tight requirements designed to protect the interests of consumers with regard to SIPPs but these measures also in effect protect the Treasury’s coffers. Bad investments where monies are lost results in lower benefit payments at retirement and less tax received on pensions subsequently payable. This would be a double tax loss bearing in mind the initial tax relief on the contributions.

Many SIPP operators also trade in the SSAS arena and no doubt will apply the same diligent criteria of administration and trusteeship when acting on SSAS’s.

Professional trustees

The Pension Regulator (TPR) which regulates all occupational schemes does require trustees to understand and manage their schemes in an appropriate manner and provides guidance in doing so from its website.

Whilst TPR can apply sanctions, many SSAS’s do not have a professional trustee or administrator and as a result it is impossible to impose such rigid controls as apply in SIPPs. Often, action can be taken only after a bad consumer outcome rather than having a mechanism in place to prevent it in the first place.

Industry commentators have called for this to be addressed and with the additional protections this would put in place and the potential for preventing loss to the Treasury it is difficult to see that HMRC will ignore these calls.

They have already introduced a requirement for a ‘fit and proper’ scheme administrator. Broadly speaking, this is an individual or company sufficiently knowledgeable of tax and pension legislation to ensure that reporting requirements and administration is carried out in accordance with the HMRC guidelines.

Temptations to misuse a SSAS

One area to be aware of on multi-member schemes is the temptation to reallocate funds from one member to another. Or to apportion growth in a manner that is inconsistent to the assets to which they relate. This might be proposed to avoid an excess lifetime allowance (LTA) for example. Such temptations should be avoided.

As an example, Mr & Mrs Brighton run their own business and have accumulated pension entitlements of £1,000,000 each in the company SSAS. They are about to draw benefits. Their two children who have joined the business have started accumulating pensions but their current entitlements are only £50,000 each. The SSAS assets consist of commercial property and a discretionary managed portfolio and cash. The total growth in the fund over the last 12 months has been £150,000. If allocated correctly each parent would receive £71,428.57 of the growth in accordance with their proportionate allocation of the scheme. However, with no protection against the current LTA of £1,000,000, this growth would push their allocation above the LTA threshold, which when drawn as benefits would likely trigger total tax charges of 55% on the excess.

Instead they decide to allocate the entire growth to the children, which if left unchecked could augment their benefits and result in the sums shifted being paid in the fullness of time as benefits partly as pension commencement lump sums free of tax with the balance at an income tax rate.

To counter this, HMRC reserve the right to charge tax on any shifting of value from one individual to another. Such a movement is likely to be treated as an unauthorised member payment and be taxed accordingly at a minimum cumulative rate of 55%.

There are signs that HMRC is taking this issue seriously following an investigation into one insurer’s plans, which appeared to offer this approach to the allocation of growth resulting in the withdrawal of the facility.

It is unclear whether any retrospective action might be taken against any previous reallocations that may have taken place since 2009. Mr & Mrs Brighton should therefore be warned against the consequences of their proposal and that they may have to suffer the tax on drawing above the LTA.

Revision of this strategy

Advisers who have seen this option or have used it might wish to revise their strategy going forward if it could be potentially open to attack. Indeed, it might be prudent to consider undoing any inappropriate allocations of fund or growth which might be regarded as aggressive tax avoidance.

There is also the worry that if identified, HMRC might deem any scheme administrator that has permitted value shifting to be ‘unfit’ under their ‘fit and proper’ administrator rules, which were introduced for SSAS effective from 1 September 2014. Such schemes could in a worst-case scenario lose their registered scheme status.

It may also be wise to consider appointment of a professional adviser to any orphan or unrepresented schemes to prevent even accidental misdemeanours for which tax charges could be triggered.

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