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SIPP vs SSAS – Bespoke pension planning for business owners and directors

When Group SIPP Wins

It is generally accepted in the market place that if there is a limited company involved, a small self-administered scheme (SSAS) will offer advantages that a group SIPP does not, when looking at bespoke pension planning. These advantages are mainly the ability of the SSAS to lend money back to the principal employer, and more importantly, with falling annual allowances, the ability of the principal employer to cover the fees. For these reasons, generally SSAS’s are preferred for limited companies.

The pooled funding arrangement within SSAS, however, can sometimes be a positive or a negative.

Case study example:

If we imagine a SSAS were there is a property in the scheme at £700,000 and a cash balance of £100,000.

The funds are held equally and the members of the SSAS are husband and wife.

It is decided that the couple want £100,000 to purchase a villa in Spain and that as the wife will spend a significant amount of time out there she will effectively retire.

She is able to take the whole £100,000 (she can effectively take her husband’s share of the cash) as a lump sum, tax free. It is anticipated it will be some time before her husband wishes to draw the lump sum so there is plenty of time for rents to build up again to allow for this to happen. This demonstrates the positive sign of pooled funding.

However, if both of them wished to invest the £100,000, but the wife had a very aggressive attitude to investment risk and wanted to invest in high risk investments and the husband wanted to remain in lower risk based investments, this effectively would not be possible under pooled funding since the investments would be held jointly. The wife owning a percentage of shares in lower risk funds the husband in higher risk funds (which was not their original individual strategy), demonstrating the negative side of pooled funding, as they each share what the other owns.

If different people contribute and withdraw from the pension fund at different points of time, their percentage share of the SSAS moves. We often finds groups of directors who want to own a fixed amount of the property, usually in equal shares. If one director, therefore has a fund of £300,000 and three others have just over £100,000 each, in purchasing a property at £400,000 through a group SIPP, they could actually own it equally. In a SSAS, effectively the member with the £300,000 owns 50% of the fund and 50% of the property, the other three owning 16.66% and they will be allocated rents in the same way. .

It is possible to use earmarking within a SSAS, however, you are effectively going against the original trust deed and rules, which requires a significant amount of additional paperwork. It also requires manual calculations, which effectively will increase the scheme fees.

For this reason alone, many are choosing the group SIPP option, which offers a degree of separation.

Each member would have their own funds in the example above. One member would have a cash balance of £200,000 and a share in the property of £100,000, and the other three members would effectively have a zero balance in their own bank account with a 25% share in the property at valued at £100,000 each.

All would have their own separate trustee bank account and their own separate investments (as rents were received). A master bank account is held to deal with property matters which is always held in the same proportions as the property, in this instance 25% each, funds from this account are regularly transferred to the individual member trustee account.

It has been Taylor Patterson’s experience over the last 12 months that group SIPP’s have been very popular. This is due to the nature of the individuals that have been in business looking to purchase those assets as opposed to any other factors and has largely been driven by the ‘pooled funding’ issues.

This is an area that is specific to individual circumstances and something that should be discussed with your financial adviser.

If you have any questions in relation to whether you should consider either a SSAS or a SIPP pension arrangement, speak with your usual financial adviser, or alternatively contact Kerry Houghton on 01772 550614 or via email Kerry.houghton@taypat.co.uk

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