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How a self-administered SSAS nearly lost a family its money

A self-administered SSAS threatened to leave a family disadvantaged when the father and scheme administrator died, tells Elaine Turtle, director, DP Pensions 

A small self-administered scheme (SSAS) that recently came to us, through one of our advisers, was in a bit of a mess. The father, who was the main member of the scheme, had died in December 2014. Some years before his death, he had removed the professional Scheme Administrator and had been running the SSAS himself. There were two members of the SSAS, himself and his wife. The scheme was worth around £1 million with approximately £750,000 being the father’s share of the scheme.

The assets were mainly invested in stocks and shares and a loan to the principal employer that had been taken out before A-Day and interest was being paid, but the capital was due to be repaid in 2016. There was also a bank account with cash held. Both members were in receipt of pension and were in capped drawdown. An actuary was calculating the maximum pension every 3 years. The members were aged 63 and 62 respectively.

The father had run the scheme very well, but unfortunately had never actively involved his wife who was a member trustee and therefore on his death, she was not aware of how the scheme was run on a day-to-day basis.

There were four children in the family, all grown up who were aware of the scheme, but had not been aware that their father had removed the professional Scheme Administrator. One daughter was active in the business, so was aware of the SSAS bank account and that pensions for her mother and father were paid from this account.

On the death of the father, the mother’s pension had stopped while everyone tried to work out what was happening with the scheme. Due to issues with the estate, it took the family over a year to look at the pension scheme. One of the sons had a financial adviser and they spoke with him to see what they should do.

The family had been unaware that the changes brought in on 6 April 2015, under the new pension freedoms, would actually be available to the scheme. They had also not realised that lump sum death benefits had to be paid out within 2 years of a death.

The financial adviser contacted us and asked if we would be happy to attend a meeting with the family to try and see what could be done and more importantly what should be done.

When we met up with the family we went through what they had found out regarding the investments within the scheme. The children had been particularly worried about the loan, but it was explained that this was not a problem, and that the company should continue to pay the interest due, but they did need to think about how the company was going to repay the capital amount which was due at the end of December 2016. The company did have funds so that turned out not to be as big an issue as originally thought. In fact, the financial adviser pointed out that by repaying the loan, it took capital out of the business which currently meant the company may have to pay tax on this depending on the company profits, which to date had been good.

The father had completed the relevant Expression of Wish forms and left all his share of the scheme to his wife. The shares in the scheme could be easily disinvested if cash was needed. The family were not aware that their mother could take income direct from the scheme and not have to purchase a widow’s annuity or take a lump sum.

The new death benefits were explained to the family and how the new rules affected them. By not having done anything, the new rules would apply to them and they needed to ‘designate’ funds by December 2016, to keep within the 2-year deadline, particularly if a lump sum was to be paid. As the father had died before he reached age 75, any benefits paid out are not subject to tax. The mother was able to have all the benefits as a lump sum or she could take ‘income’ from the father’s pot as and when she needed it and this would not be subject to income tax.

One of the sons asked if funds could be paid to them as their mother had substantial funds anyway and taking funds out of the scheme into her estate was just adding to a possible inheritance tax issue.

It was explained to the family that their mother could decide that she did not want or need all the money and could decide to provide some of this to the family. The money had to be paid as a lump sum due to the fact that when their father died, the new pension freedom rules were not in place and so he could not have made the decision to make the children ‘nominees’ of the scheme. This was for non-dependants who can be paid income instead of a lump sum, they could however be paid a lump sum. There was around £400,000 in cash and so each child could have £100,000 paid to them if their mother agreed that she did not need the money and was happy for it to be passed to her children.

A couple of weeks later the financial adviser made contact to say that the family had decided to give £50,000 to each of the children and the balance to be left for their mother. As she doesn’t need the money at the present time, she has placed her pension on hold. The SSAS was converted to flexi access drawdown (FAD) as no further contributions were going to be paid into the scheme and it now meant there was no need for the three-year reviews of the pension levels. The company is making plans to repay the loan and the financial adviser is drawing up plans for the investments of these funds for the scheme.

If the family had not made the decision to speak to a financial adviser they may have found that they exceeded the 2-year deadline and would not have known that the Expression of Wish could be amended. This way some funds had been passed to the children, so this reduced a potential IHT bill going forward. The mother still has funds that she can draw on if she needs to and if she lives beyond age 75, then tax will be paid at marginal rate on the funds left to the children.

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