Should you use a SIPP or a SSAS?
There are key differences that make each the best to use depending on clients’ needs. Stephen McPhillips, technical sales director, Dentons Pension Management Limited delves into the details
Pensions’ A-Day on 6 April 2006 (so called “pensions simplification”) brought some very welcome alignment of self invested personal pensions (SIPPs) and small self administered schemes (SSAS) with each other. However, despite certain features of each being matched with the other (for example, maximum pension scheme borrowing), there remain key differences between the two types of arrangement and those differences can shape an advice firm’s recommendation to a client. This article will look at SIPPs and defined contribution SSAS to help explore the question of whether a client should consider a SIPP or SSAS.
Firstly, what features are the same?
Tax-relievable pension contributions to both are constrained by the annual allowance (AA), and, if applicable, the money purchase AA and tapered AA. Member contributions to both are constrained by the member’s pensionable earnings if gross contributions in excess of £3600 per annum are to be made. Carry forward rules are the same for both SIPP and SSAS.
Flexi-access drawdown (FAD), capped drawdown (which was in place prior to “pension freedoms” coming along in 2015) and annuity purchase can be provided by both SIPP and SSAS. An option called “scheme pension” might exist in some SSAS and SIPP arrangements, but it could be argued that this is now obsolete, given that members can take as much income as they like through FAD (previously, one of the drivers for use of scheme pension was to maximise the member’s income from the pension arrangement).
The same range of death benefit options apply to SIPP and SSAS.
With the exception of certain loans and certain share acquisitions, the range of permissible investments is broadly the same across SIPP and SSAS. These exceptions, of course, might be the driver for one vehicle to be used instead of the other, and they will be considered further below.
What are some of the differences?
A SSAS is an occupational pension scheme (OPS). Immediately, therefore, it differs from a SIPP because an OPS needs a “founder employer” to create it. Generally, this founder employer is a limited company (rather than a partnership). A SIPP does not have a founder employer.
The SSAS trustees can make loans (within strict conditions laid down by HMRC) to employers that participate in the scheme. SIPPs cannot make loans, directly or indirectly, to connected parties. This difference alone might be the driver for the client to have a SSAS rather than a SIPP. A SSAS can lend monies to unconnected parties in the same way as SIPPs can, so there is common ground between the two there.
In terms of share purchase, SSAS are constrained by self investment rules that prohibit more than 4.99% of the fund value being used to acquire shares in a company owned or controlled by a SSAS member. Such a restriction does not apply to SIPPs, but other due diligence considerations (e.g. the ‘taxable property’ rules) could rule-out the purchase by either vehicle.
A SSAS can be a multi-member scheme, whereas SIPPs are generally individual arrangements per member. As a multi-member arrangement (a “common trust fund”), a SSAS can offer an advantage over SIPP when it comes to finding / creating liquidity with which to pay transfer values, retirement and / or death benefits. This is because any member within a SSAS can look to any asset held by the SSAS trustees to assist with benefit payments. Take, for example, a situation where the SSAS trustees own commercial property, a platform investment, unquoted shares and cash deposits. Even though a member’s fund value may have been calculated with reference to the investment returns achieved across all of these to date, the more liquid of these can be used to meet the member’s benefit payments if required (and if agreed by all member trustees unanimously). This flexibility does not exist in an individual SIPP and assets might need to be sold (perhaps at an inopportune time) in order to pay benefits.
This potential flexibility is sometimes the driver for a SSAS rather than SIPPs, particularly where there is a significant age differential between the members, and liquidity for the older member’s benefits needs to be planned for. Intergenerational tax planning of this nature can be more efficient and cost-effective in a SSAS than it would be across two SIPPs for the individuals.
For example, where a commercial property is involved, if this is notionally reallocated in a SSAS from the older member to the younger one (in exchange for other assets of the same value), there would be no Stamp Duty Land Tax (SDLT) / Land Based Transaction Tax (LBTT) liability, no VAT implications (if the property is opted to tax) and limited legal work needed to effect the change. Contrast this with a property held across two SIPPs, where one member’s SIPP formally buys out the other member’s share with all of the attendant costs such as SDLT / LBTT, VAT, additional legal fees and so on.
These are just some considerations around SIPP and SSAS as vehicles of choice for clients. Much will depend on the client’s individual needs, of course, but there is no doubting that both SSAS and SIPP offer considerable flexibility and both should be on the radar for corporate (i.e. limited company) clients especially.