What are SSASs?
A Small Self-Administered Scheme (SSAS) is a trust based occupational pension scheme.
SASSs are typically defined contribution (DC) schemes which normally have no more than 11 members, all of whom are trustees of the scheme. Whilst it is possible to have a SSAS with a greater number of members, or for there to be members who are not trustees, different regulatory requirements come into play at that point. This blog applies to SSASs with fewer than 12 members, all of whom are member trustees.
Investment considerations
SSASs can invest in a range of assets whilst maintaining favourable tax treatment, some of which are: commercial property and land; equities; hedge funds; and UK Government gilts.
A SSAS can normally borrow money up to 50% of the scheme's net asset value (taking into account any existing borrowing or lending), to purchase investments. Therefore, it may be possible for a SSAS to purchase its sponsoring employer's business premises and then enter into a lease with the scheme's sponsoring employer.
If the relevant conditions are met, the SSAS may also lend money to its sponsoring employer which is one perceived advantage of this type of arrangement. In order to avoid punitive tax charges, the following requirements must be observed:
- A first ranking security must be granted over an appropriate asset (scheme owned or otherwise) that is equal to the value of the loan plus any interest payable. The applicable tax regime should also be consulted here, as tax implications may arise depending on the asset.
- Prescribed calculation must be used to calculate interest, to avoid punitive 'unauthorised payment' tax charges arising.
- 5 years is the maximum term of the loan.
- Loan amount must not exceed 50% of the net value of the scheme's assets.
- Repayments must be made in equal instalments. However, if a sponsoring employer is in financial distress there may be the option to rollover repayments for a set period.
Issues that may arise in challenging economic conditions
During challenging economic conditions when lending streams are less available, the SSASs ability to make loans may be an attractive course of action. If the scheme does lend cash to its sponsoring employer, it's important to be mindful that a repayment default will normally carry undesirable tax consequences.
As with any pension investment vehicle, economic volatility will have an impact here. Fluctuating asset values pose a challenge. For example, if tenants of a commercial property owned by the SSAS are unable to pay their rent, this may compromise the SSASs ability to service its own debts.
Professional advice should be obtained if a SSAS or any party borrowing from it is in default.
Financial Services Compensation Scheme ("FSCS") protection
In terms of FSCS member protection, if the provider of an investment made by a SSAS defaults, there may be scope for members to make a claim to the FSCS for compensation. But if members of the SSAS themselves made a poor investment that resulted in loss (perhaps in something unregulated), then no FSCS coverage would typically be available.
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