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The
first choice for people in pensions Pensions
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Take
your pick SIPPs and SSASs don’t sound exciting, but they offer significantly more flexibility than standard pension schemes. Typically, they’ve been products for high net worth individuals, being relatively costly to set up and run. SSASs A SSAS (Small Self Administered Scheme) is useful for directors of family businesses and executives in such companies. Contributions are made by the company and attract corporate tax relief at the highest rate up to a maximum ceiling. SSASs are pooled funds, of which the members are usually also trustees; there also has to be a pensioneer trustee, a place often filled by approved professional administration firms like James Hay. Trustees have wide powers: they can lend and borrow, including lending to the company and buying shares in it. Andy Bell of Sippdeal suggests that: “Historically, there was a fairly clear dividing line between the two – SSASs were for directors of family owned companies, while SIPPs (Self Invested Personal Pension) were for self-employed professionals.” A SSAS can assist tax efficiency when a company is being handed on to the next generation of the family. Trevor Owen-Jones, a director at Buckles Ltd, explains how it works. “A SSAS isn’t an earmarked contract; the assets of the pension schemes aren’t actually owned by the members individually. So rather than taking out pensions benefits, the older members of the family can leave them there for their children. However, as it’s an occupational scheme, the children must work in the company – and their benefits will be related to their final salaries,” he says. The disappearance of carry-forward allowances has made SSASs more attractive for lump sums, since a company can fund a director’s pension scheme for past service, and Owen-Jones asserts that it would technically be possible for a company to put the whole contribution into the scheme in a member’s final year. David Seaton, director of consultancy at James Hay Pensioneer Trustees, agrees: “Anyone who’s on a fairly high salary would be better off in an occupational scheme like a SSAS, as they could put more into it.” SSASs are expensive, though, with setup costs in the range of £1,000 to £1,500. But as Seaton points out: “If you’re putting £100,000 in, it’s effectively a very small cost”. While SSASs are excellent vehicles for putting money into a pension fund, at the other end – taking your pension out – they are relatively inflexible. According to Owen-Jones, SSASs have brought in an executive pension drawdown, but it’s much more limited than with SIPPs. The member needs to retire completely before taking any income – which may not be acceptable to some family business owners – and at least 90 per cent needs to be taken, while with SIPPs as little as 35 per cent can be taken initially. However, members can defer their formal retirement up to the age of 75, keeping their assets in the scheme. According to corporate strategist and professional trustee Robert Justice, this age limit may be lifted entirely – which would help in family companies with second generation SSAS members. Many advisers recommend switching out of SSASs towards retirement and putting the benefits into SIPPs in order to get the benefits of flexible drawdown. However, from 6 April 2001, the Inland Revenue has applied a new GN11 test regulating the amount that can be transferred. Bell comments: “There’s a big grey area as to whether you can transfer up to the GN11 figure and leave the surplus in the SSAS, or whether, if you have assets above that figure, you’re stuck in the SSAS for good.” Actuaries are unhappy with the GN11 calculations, which use outdated figures for inflation, investment returns and mortality. Seaton explains that some actuaries have said this is forcing them to go against their institute’s guidelines. More controversy in this area can be expected. SIPPs SIPPs – unlike SSASs – are individual pension funds, not pooled funds, so you have a lot more control over a SIPP as they are treated as personal pensions, not occupational schemes. Amanda Davidson of Holden Meehan says: “They have all the same tax benefits, but a vast range of things you can invest in, including commercial property, direct equity, unit and investment trusts, and insurance company bonds.” SIPPs are quite expensive to set up and run, and Davidson warns off smaller savers. She says: “This is not for someone who wants to put a few hundred a month into a pension. You really need £200,000 as a minimum, so it’s for people who have built up funds within their existing plans and want to change the way they are managing them.” Typical costs might be about £500 to set up a SIPP and £400-500 a year administrative costs. However, Owen-Jones says some clients just want to have more control over the way their funds are managed. “I’ve got one client who does it on a £30,000 single premium fund. He wants to trade the stock market, and he’s not doing badly,” he says. Bell also highlights the transparent nature of SIPP charging as a feature many clients welcome. “The fees you’ve got to pay are quite clear. Clients can easily see what they’re paying and value the added benefit for themselves,” he says, adding that few people start their pensions saving with a SIPP: “A lot of people start with a typical insurance style personal pensions product and then transfer – not many come in on day one and contribute to a SIPP”. SIPPs can accept transfers from most other types of pension scheme and can be a good way to consolidate savings in different schemes. Timing is important, though, says trustee Justice, as annuity rates and market value adjusters can affect transfer values. Recent moves by stockbrokers and online providers such as Sippdeal have made SIPPs available to investors with smaller amounts of funds. Bell claims: “We’ve made SIPPS more accessible to the man in the street by providing an efficient and basic online service.” Bell’s view is that the money belongs to investors and if they want to be in control of it, then they should be allowed to be. Davidson is less sure that most investors need or can handle the SIPP service, asserting that it takes time and expertise to run a SIPP. “You are probably creating a bit more risk in your portfolio, and you need the time to manage it. And if you want to do a SIPP you must use an IFA, as they are the glue that binds together the SIPP, using specialist advice from surveyors, brokers and fund managers where it is needed.” She believes that in the past, SIPPs provided a way for investors to diversify when most companies running personal pensions schemes were not offering choice in funds. Now, however, many pension providers allow clients to choose between funds from half a dozen household name investment houses, forming “a half-way house between a full SIPP and a bog standard pension plan”, at a lower cost than SIPPs. SIPPs also have an advantage over SSASs in their income drawdown flexibility. Bell says: “You can draw down irrespective of your employment status, you don’t have to retire to get an income and you can take between 35 per cent and 100 per cent at any stage.” Both SSASs and SIPPs are able to purchase business property (residential property, including buy-to-let, is not a permitted investment) as Owen-Jones points out. “There’s a big tax advantage to buying property through a pension scheme. If the company rents the property from the pension scheme instead of making the purchase itself, the rent is 100 per cent tax allowable, whereas if it owned the property, it would only get relief on interest, not capital repayments,” he says. The
SSAS or SIPP also protects the individual’s pension assets. He adds:
“If the company is in liquidation, your pension assets stay outside
the scheme, and if the property rises in value, the pension scheme
– unlike a company or individual – pays no capital gains tax.” While
the majority of savers will probably be happy with a “normal” personal
or occupational pension plan, both SSASs and SIPPs retain advantages
for the higher net worth individual, as well as for investors who
desire greater control over their pension investments. Whether they
will retain these benefits as Gordon Brown continues to chisel away
at tax reliefs, though, remains an enigma.
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