Directors and business owners considering their pension options need to balance their personal financial requirements with what is most appropriate for their business. The two primary options are often either a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), but what are the differences?
First, a SIPP is a type of personal pension that offers a wider variety of investment options. Anyone can join a SIPP. A SSAS is an occupational scheme that can only be set up by a business and its directors. There are usually no more than 11 members of a SSAS and they are often only directors or key employees of the business.
There are five key areas where SIPP and SSAS schemes differ from each other and other types of pension scheme:
1. Scheme trustees
Pension trustees’ responsibilities predominantly include registering and reporting on the pension with HMRC. They will also keep members updated on potential issues, such as the Lifetime Allowance, or organise any transfers that are taking place.
A SIPP provider will typically act as trustee and scheme administrator, although some specialist SIPP providers allow you, the member, to become a joint trustee.
A SSAS is completely different; all members of the scheme are appointed as trustees and share responsibilities. This, naturally, means that members have a much higher level of involvement in the administration of the pension.
2. Control and ownership
With a SIPP the provider has overall control of the day-to-day responsibilities of running the scheme. The member simply makes investment decisions, which are allocated to the individual.
Again, a SSAS is quite different. Investments are pooled, and each member owns a notional share of them. The employer has overall control of the scheme, but the trustees (i.e. all of the members) make the investment decisions.
3. Purchasing property
You are able to purchase commercial property with either a SIPP or a SSAS. For business owners this can be the premises they are operating out of. The pension would then own the property and the business would effectively pay rent to the pension. There are many tax benefits to this arrangement, if you would like to discuss this in detail don’t hesitate to get in touch with our financial planners.
The ability to purchase and invest in commercial property is one of the largest drivers for business owners to opt for either of these types of scheme.
With both types of pension, you are often able to borrow up to 50% of the pension value from a bank to help the fund the purchase.
A fairly big distinction between the two, and a reason that a SSAS may be more appropriate for business owners; a SSAS has the ability to lend to the business. A SIPP simply does not.
The employer can borrow up to 50% of the scheme’s net asset value, as long as it is secured on an asset, such as property, owned by the business. Loans are not permitted to members or their relatives.
This can really help a cash flow for a small business in the right circumstances.
A SSAS is able to invest in the director’s own business. Up to 5% of the value of the pension fund can be used to purchase shares. If the director owns more than one business they can invest in all of them, as long as the total combined value of the investment is no more than 20% of the pension.
The benefits of a SIPP or SSAS over other pension arrangements, especially for business owners, are quite significant. If you or any of your clients would like to discuss the merits of these pensions in greater detail, please feel free to get in touch. We are proud to be both Chartered and Independent, meaning we have achieved the ‘gold standard’ in financial planning and our advice is truly whole of market; we have no obligation to one pension provider or product.