Property transactions completed by pension schemes over the last decade have largely been investments made by Self Invested Personal Pensions (“SIPPs”). Offering a wide range of investments to almost any UK individual, SIPPs have proven to be immensely popular with an estimated £75 billion currently invested in such arrangements.
The current economic climate has however, resulted in the resurgence of the Small Self-Administered Scheme (“SSAS”). The SSAS was the pension scheme of choice for company directors in the 70s and 80s. SSASs are established by the employer for the benefit of it’s employees and require that:
- some or all of the assets of the scheme are invested other than in insurance policies;
- at least one member of the scheme is connected with either another scheme member, a trustee or the employer; and
- there are fewer than 12 active members.
The member trustees are responsible for the running of the SSAS which includes making investment decisions. For that reason the SSAS is probably most attractive to successful family businesses.
SIPPs and SSASs are both subject to the same tax regime and therefore have the same rules on contributions and benefits. However there are two key elements of the SSAS which make them more appealing to family businesses in the credit crunch:
Loan to Sponsoring Employer
Perhaps the most useful feature is the ability for the SSAS to make a loan back to its sponsoring employer. At the moment banks are restricting funds that they are prepared to make available to small businesses therefore even where banks are prepared to support successful businesses and provide finance it tends to be on terms which are inflexible. It can also be extremely difficult for businesses to obtain funding for what could be considered to be more speculative propositions such as development. A SSAS has the ability to lend a proportion of its capital to the sponsoring employer at advantageous rates.
Loans can be made provided they fall within the following criteria:
- the maximum amount of the loan is 50% of the value of the net assets of the scheme (valued at the date of making the loan):
- the loan is to be secured by way of a first legal charge on assets of equivalent value;
- the loan is to be for a term of no longer than 5 years;
- a minimum interest rate of 1 % above the average base rate of the six leading high street banks; and
- is to require the repayment of capital and interest in equal instalments over the term of the loan.
SIPP providers on the other hand seldom allow SIPP loans as a result of complications including ensuring that any loan is not used to invest in taxable property.
A second feature of SSASs is what can be called the common trust. When a SSAS buys property it does so as a single property transaction and holds the assets on common trust for all it’s members. This is distinct from a SIPP where each member owns a proportion of the property through their own plan.
SSASs and SIPPs are subject to the same borrowing limits of 50% of the fund. However, as a result of the common trust it can be easier to arrange funding on a SSAS as the loan will be based on the funds total assets.
There are a couple of points to note from this:
Firstly with the SSAS there is the potential to utilise the resources of up to 12 members to acquire property which provides greater purchasing power and the ability to maximise gearing.
Secondly and more importantly, the structure of the SSAS allows it to be flexible when providing it’s benefits. As the assets of the fund are not earmarked to a particular member it means that if a member wishes to start drawing benefits from the scheme, the remaining members can decide whether to use other scheme assets rather than having to sell any particular property to free up resources.
Whilst the SSAS is the scheme of the moment it is essential that you discuss any investment schedule with your Independent Financial Adviser.
[This is not intended as investment advice and Clarion Solicitors Ltd is not authorised by the FSA to give Investment advice]
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