Updated 03 December 2020
An SSAS pension – also known as a small self-administered scheme – is a type of pension available for limited companies or partnerships in the UK. It’s taken out by company directors to fund their own retirement, and these directors have full discretion as to how the pension fund is invested.
Business owners often use their SSAS to invest in commercial property (such as their own premises), but many other investment options are available. Here’s more about how SSAS pensions work, and the pros and cons for business owners.
A small self-administered scheme is a type of occupational pension that’s managed independently by a company’s directors. It provides retirement benefits to these directors, as well as other senior staff sometimes also to certain family members, regardless of whether they work for the company. Each member usually becomes a trustee, and so has some say over where to invest the money. The number of members is limited to 11, hence the term ‘small’. For this reason, they’re more common in family-run businesses and start-ups.
SSAS pensions function like most other workplace pensions, with a few key differences.
Like most defined contribution schemes, the employer and/or its members pay contributions, which are all eligible for tax relief. Members can start withdrawing benefits from the age of 55 in the standard way, with the same option of taking 25% as a tax-free lump sum.
However, unlike other schemes, there’s often no pension provider involved. All the members, or trustees, decide what happens with the monies, thus gaining greater flexibility and control. Another key difference is that the benefits of the scheme can be passed down to future generations.
SSAS pensions offer lots of flexibility, but with the same tax efficiencies as other schemes. These and other benefits make it an attractive option for company directors.
You can choose to invest your SSAS pension funds in a wide variety of ways, from stocks and shares to unit trusts, corporate bonds and commercial property. It’s the ability to invest in commercial property that is one of the most attractive features of SSAS, as it can include the company’s own business premises, which are then leased back to you – so you kill two birds with one stone, purchasing a premises while investing for your retirement.
SSAS pensions offer the same tax benefits as other occupational pension schemes. For member contributions, basic rate taxpayers get a 25% tax top up, while higher rate taxpayers can claim additional relief on their tax return. On top of this, most assets and investments within the scheme have no tax liability, and any commercial property in the scheme is exempt from capital gains tax on the final sale.
There’s no need to go through a pension provider, so you save on its annual management and administration fees.
SSAS pensions are sometimes also known as ‘family pensions’. This is because non-employee family members can join, and the SSAS can also hold assets in trust and pay benefits to families long after the original members have passed. As a pension, it’s also protected from company and personal creditors.
Another benefit is that companies can take out a loan from their SSAS pension to fund their business, at an interest rate of 1.5%. This reduces reliance on banks and their related charges.
Here are the main limitations and potential drawbacks of this kind of scheme.
No more than 11 members can join an SSAS pension scheme.
With no pension provider, the members themselves must act as trustees. They therefore carry the legal responsibilities and liabilities of running the pension and ensuring compliance with pension law.
The trustees also have the added responsibility of handling all reporting to HMRC and arranging tax relief collection. However, your accountant can help with this.
SSAS and SIPP pensions are similar in that both give you influence over how your pension pot is invested. The key difference is in the name. Self-Invested Personal Pensions (SIPP) give an individual control over their investments, where SSAS pensions are for company directors and controlled by all trustees of the scheme. Similarly, the entire pension pot belongs to the owner of the SIPP, where there are no individual pots in a SSAS. Rather, each share is defined by a percentage.
You can transfer an existing pension pot into a SSAS pension. However, it’s a good idea to consult with an independent financial adviser (IFA) first, to make sure it is indeed the right move. They’ll also help you navigate the terms and conditions of transfer, so you’re aware of any possible exit fees.
The costs of setting up a SSAS pension vary, depending on whether you’re using a pension provider or going it alone. If you’re going through a provider, you’ll typically pay an establishment fee, annual administration fee and transfer-in fees if applicable. You’ll also pay fees once you start using the scheme, including fees around purchasing property or borrowing money.
You need to set up a limited company with Companies House before you can open a SSAS. Once this is done, you’ll:
At retirement, members of SSAS pensions have the usual pension options for drawing benefits. They can opt to take the first 25% of their share as a tax-free lump sum, and then use the rest of their pension to provide an income – usually either by purchasing an annuity or by setting up a drawdown scheme, or perhaps using a combination of these options.
A great benefit to SSAS pensions is that they’re an asset which can be handed down through the generations. Beneficiaries can receive assets quickly and easily, and there is no inheritance tax because the assets form part of the pension, not a person’s estate.