In recent weeks I’ve received a number of questions all asking whether a SIPP or a SSAS is more suitable for business owners?
I know that this is a quandary many advisers are regularly faced with, and usually the default route is to advise the client to use a SIPP. I’m not inferring that this is the wrong advice, however, I’m not convinced that the option of using a SSAS is usually given sufficient consideration.
In this article I want to highlight the difference between a SIPP and a SSAS not to promote one over the other, but to hopefully get SSASs considered more often and used where their features will bring more benefits to the business owner.
Not all SIPPs are the same
I think it’s important to recognise that not all SIPPS are alike. Some are fully functioning and can accept a range of investments (in this article I call these Full SIPPs). Others are designed to only give the investor limited choice between certain investments on a platform. I don’t compare these to SSASs; they are much cheaper but have almost none of the functionality of a SSAS.
SSASs were created specifically to help small business owners develop a retirement fund and to have the ability to use the pension to aid the growth of their business. They are occupational schemes and as such have different regulators, rules and restrictions.
SIPPs were designed to bring flexibility to personal pensions.
Understanding that SSASs were designed for businesses (in fact only a trading ltd company or LLP can establish a SSAS) and SIPPs are for individuals explains why there is difference in regulation.
Business owners are seen to be more sophisticated and as such require different regulation than individuals, hence, SIPPS are regulated by the FCA and SSASs are regulated by the The Pension Regulator (TPR). Occupational schemes also have a different set of rules which bring additional flexibility.
This extra flexibility gives occupational schemes some clear advantages over SIPPs some of the features and applications are:
1) Loan Backs (also known as Sponsoring Employer Loans)
The loan back feature is unique to SSASs. In simple terms this feature enables the SSAS to invest in its sponsoring employer by making a loan to it.
There are a number of conditions that must be met, such as the loan must be secured and have a maximum term of five years. But providing all the conditions are met this can be an extremely useful tool for business owners.
It means a business owner can be comfortable contributing to their pension, safe in the knowledge that should the need arise (for example if they hit a cash flow problem or need to purchase an asset) they can lend up to 50% of their scheme back to their company. Crucially, all of the interest they pay on the loan goes towards their pension, it’s not just swelling the profits of a bank.
2) Buying and holding commercial property
We will discuss commercial property in depth in another article, but SSASs have a number of clear advantages when it comes to commercial property.
a) SSASs are collective schemes, which means members can pool their funds to purchase commercial property.
N.B. it is possible to use multiple SIPPs, but it is a very long winded and complex way to end up with the same result.
b) Contribution limits, SIPPs are personal pensions, so are restricted to personal contribution limits. Currently 40k p/a
SSASs aren’t limited by the same constraints and with pre-funding can have contributions up to £2million pounds – we will cover this in more depth in another article.
c) Distribution on death. It is possible to pass a member’s share of a property to their beneficiaries within the trust when they die, its far more complicated with a SIPP.
3) Range of investments
A SSAS can make the widest range of investments of all pension schemes. However, one of the features of the SSAS might mean that the SIPP is the right choice for the business owner. To explain this in more depth, all members of the SSAS must also be trustees, and for the SSAs to make investments all trustees must agree with the investment decision. So, if there are business owners who don’t have the same objectives and attitudes to investing, this point must be considered, as it can cause problems at a later stage.
As well as the functionality, there are a number of other factors to consider before deciding which is the most suitable for a business owner i.e.
Time frame to establish
Another key difference is the time frame to establish either a SIPP or SSAS. Because the SSAS is a standalone trust, each scheme goes through an application process with HMRC. Depending on the time of year, this can vary between approx. 4-8 weeks. Because SIPPS are part of a master trust, they can be established in days.
Cost of establishment
There is a general misperception that a SIPP costs a lot less to establish and operate, obviously, it varies from provider to provider but in general a Full SIPP will probably cost more to administer than a SSAS these days and will have less flexibility.
One of the reasons some advisers quote for using a SIPP rather than a SSAS is confidentiality, with a multi member SSAS each member will know how much is in other members funds. I do take this point; however, it is possible to have a single member SSAS which would overcome this issue.
I hope all the above has given an objective assessment of the difference between a SIPP and a SSAS
SIPPs and SSASs are different tools, the SSAS has more flexibility and usually costs less than a full SIPP. However, it is important to consider whether all member trustees agreeing on future investment decisions would be an issue.
If timing is an issue, then a SIPP will always be established quicker than a SSAS.
Also, if a business doesn’t require any of the additional features the SSAS brings i.e. loan backs and holding commercial property, then the business owners should consider whether they need the additional cost of having either a full SIPP or a SSAS and maybe a standard platform SIPP or some other personal pension scheme could be more appropriate.
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