Recently, we’ve been working closely with a range of business owners regarding their retirement and Corporation Tax planning. Clients are often looking for a tax-efficient solution that offers flexible benefits and can help them to deal with the impact of the Money Purchase Annual Allowance rules.
One such solution is a Defined Benefit Small Self-Administered Scheme (a DB SSAS). It’s a way of adding real value to a client’s retirement plan, particularly for company directors.
What is a DB SSAS?
A DB SSAS is a Small Self-Administered Scheme that can be established by any limited company in the UK.
The contributions to this type of arrangement are based on targeted ‘defined benefit’ pension provision, meaning the contribution levels are based on the desired guaranteed pension income in retirement. This is unlike a more conventional Defined Contribution scheme.
A DB SSAS can also offer additional flexibility for clients facing the impact of the Money Purchase Annual Allowance rules.
We’re finding that an increasing number of business owners want to pay company contributions for its key directors but are often frustrated by the current Annual Allowance restrictions imposed on defined contribution pension schemes.
However, if the limited company sets up a DB SSAS, it can make legitimate company contributions using chosen scheme members’ Annual Allowances based on the actuarial cost of that Annual Allowances’ worth as a targeted pension benefit.
Put simply, these schemes combine the benefits of an SSAS with a defined level of scheme pension. The pension income can be paid as a scheme pension or an open market Annuity can be purchased.
Another advantage of a DB SSAS relates to Corporation Tax planning. A client benefits from Corporation Tax relief on all contributions that are ‘wholly and exclusively for the purpose of the business’ (i.e. are justifiable by reference to what the client does for the company).
Corporation Tax relief is granted by the local HM Inspector of Taxes and can be spread across two or more tax years in certain situations.
Bear in mind that there will be costs involved, as each scheme requires an actuary. Their role is to calculate the contributions required to meet the defined benefits. They are also responsible for complying with, and reporting on, HMRC allowances and limits for the schemes and individuals.
SSAS clients can typically include:
- Business owners looking to invest pension savings in their business
- High net worth individuals who want more control over their pension savings
- Adventurous investors wanting access to more unusual investments.
An example of how a DB SSAS could help your clients
Many business owners are finding that they are impacted by Money Purchase Annual Allowance (MPAA) rules when they come to make pension contributions in a profitable business year.
In the 2019/20 tax year, the MPAA limit in terms of pension input contributions is £4,000. (Note that this limit only applies to clients who are funding into a Defined Contribution plan or scheme, such as a SIPP, GPP, SSAS or Personal Pension).
Here’s an example of how a DB SSAS could work.
A client, aged 56, owns a limited company under their sole management. They report a £300,000 profit, which can potentially form part of their overall remuneration for that year. The client has not previously (and will not in this tax year) be impacted by Tapered Annual Allowance rules.
The client had fully utilised their available Annual Allowance up to and including 2016/17.
The client triggered the MPAA in 2016/17 when they took flexible benefits from their SIPP in the form of a lump sum and a small amount of taxable income. The MPAA in that tax year was £10,000 so the company contributed this sum into the SIPP.
In 2017/18 the MPAA was reduced to £4,000, so the company contributed this sum into their SIPP in 2017/18. In 2018/19 the MPAA was still £4,000 and therefore the company contributed this sum into their SIPP.
When the client triggered the MPAA, they did not realise they could have considered using the ‘alternative Annual Allowance’ by becoming a member of a Defined Benefit scheme.
A financial planner confirmed the client can still access a Defined Benefit Small Self-Administered Scheme and carry forward unused alternative Annual Allowance and the current tax year’s unused alternative Annual Allowance.
The client’s company established a new one-member DB SSAS. The client’s alternative Annual Allowance from the last three years, plus 2019/20 tax year comes to £138,000 (2016/17 = £30,000, 2017/18 = £36,000, 2018/19 = £36,000, 2019/20 = £36,000).
This £138,000 alternative Annual Allowance, when converted into a defined benefit (Annual Allowance divided by 16) deferred scheme pension comes to £8,625 per annum. A company contribution of up to £414,000 could be made (based on a retirement date of 58) to meet the Defined Benefit deferred scheme pension promise.
The client is a controlling director and so the company would make the contribution as part of their overall remuneration plan for 2019/20. The company could also benefit from Corporation Tax relief on this contribution.
A DB SSAS therefore represents a new funding route for a client to accrue a new and valuable pension benefit in retirement, whilst giving them a new way of managing a wholly and exclusive qualifying expenditure within the business.
Get in touch
If you or your clients need any help with their financial planning needs, or you’re interested in how you can work more closely with us, please get in touch. Email email@example.com or call 01454 416 653.
A DB SSAS will require a long-term commitment to investing in a pension for the benefit of the members and that other pension solutions should be considered. A DB SSAS may require a client to receive ongoing investment advice and fund performance might not allow delivery of the defined benefit.