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Prior to April 6, small self- administered schemes (SSASs) offered one of the last remaining “loopholes” allowing pension assets to be passed down to family members on death without incurring heavy tax charges. Now, though, that loophole has been closed.
The government has changed the rules on scheme pensions, which can be accessed through a SSAS after a member turns 75, to bring them under the same tax rules as alternatively- secured pensions. Any remaining pension assets for members who die after April 6 will be taxed at up to 70 per cent, plus a possible further 40 per cent inheritance tax on the remainder, taking the total potential tax bill up to 82 per cent.
This raises the question of whether SSASs are still a viable option for pension assets.
Standard Life thinks not. It is still selling SSAS schemes but Andrew Tully, senior pensions policy manager, says there is not much interest in them compared with self-invested pension plans (Sipps). “Everything you can do in a SSAS you can do in a Sipp now,” he says.
Not so, say others. SSASs are occupational pension schemes targeted at small-business owners and offer certain advantages likely to be of use in a business. One of these is that, as an occupational pension scheme, they can lend money back to the sponsoring employer, which is likely to come in useful for start-ups or small companies. Sipps are not able to make any loans to connected parties.
Another advantage is that a SSAS has common ownership of assets, which comes in handy when people leave the scheme.
If members of a company all have separate Sipps, they can jointly purchase an asset such as the company property, which is then leased back to their employing company. But Ian Hammond, managing director of Rowanmoor Pensions, warns that if one of the Sipp holders wants to sell their share, complications can arise as there may not be a willing buyer.
Because a SSAS operates as a common trust fund, the scheme can raise borrowing on the whole of the property to raise liquidity to transfer the member out.
The cost of running a SSAS can be more than a single Sipp. Even so, Hammond says that, for smaller numbers of people, the difference is reduced – and that the cost of a three-man SSAS is actually lower than the cost of three individual Sipps.
A SSAS can also pay out higher benefits once the member reaches 75. The only options for a Sipp holder at age 75 is to buy an annuity – which locks up pension assets with the provider for good – or move into an alternatively-secured pension (ASP).
Because a SSAS is a separately-registered scheme, it can offer a scheme pension at age 75. A scheme pension is any pension paid out by a fund that is not income drawdown or an annuity and can include final-salary pensions and money-purchase pensions from occupational schemes.
The amount of pension paid out under a scheme pension is calculated regularly by the actuary, taking into account the value of the fund and the increasing age of the pensioner. Under an ASP, the value of the pension is calculated using government actuarial figures which will not be bespoke. Hammond says: “This means that over a period, the pensions paid under a scheme pension will be significantly higher than those under an ASP.”
However, pension assets under scheme pensions cannot be given to charity as a way of avoiding inheritance tax – an option that is available under an ASP.
Hammond adds that he does not believe that anyone took out a SSAS purely to circumvent the inheritance tax rules on pensions. He believes that anyone reviewing their pension arrangements – particularly relatively younger people in their 40s or 50s – should not pay attention to rules on inheritance tax as, by the time they are 75, the legislation is likely to be very different.
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