Funding basis
Careful monitoring of a Small Self Administered Scheme (SSAS) is required because the assets
are pooled between up to 11 members. The IR SPSS require that
the value of the pension fund does not exceed the benefits to
the members at the normal retirement age and every three years
an actuarial funding report must show that the benefits are
with permitted IR SPSS levels.
The employer can choose between making contributions
as a percentage of current remuneration or a fixed amount and
the actuarial valuation report (AVR) can use a different basis
for each member in the SSAS. Once the basis is determined, this
can be used for a period of up to three years. At the end of
this period a new rate can be selected for a further three year
period.
Since 6 April 2006 Pension Simplification has replaced eight tax regimes and introduced two new controls. Firstly there is a Lifetime Allowance where the maximum amount of pension
savings that can benefit from tax relief and has been initially
set at £1.5 million for the 2006/07 tax year increasing to £1.8 million for the 2010/11 tax year. The other control is the Annual Allowance that limits the amount that can be contributed to a pension to £215,000 for the 2006/07 tax year rising to £255,000
by 2010/11 tax year and is currently £235,000 for the 2008/09 tax year. The affect of
the annual contribution limits for SSAS members can be seen in the
following table.
SSAS maximum contributions
Tax year
Annual amount
2006/07
£215,000
2007/08
£225,000
2008/09
£235,000
2009/10
£245,000
2010/11
£255,000
Where funding exceeds
the annual allowance an annual allowance charge of 40% is levied
on the excess in contributions.
In some situations a Small Self Administered Scheme could become over funded and there
are a number of ways the Pension Schemes Office will require
the surplus to be eliminated as follows:
•
Suspend all contributions to the SSAS;
•
Increase remuneration to
the members;
•
Increase or add to the
existing benefits to the members;
•
Add new members to the SSAS;
•
Make a payment back to the
company less a tax charge.
Corporation tax relief
There are significant tax planning opportunities for the company
when making contributions to a Small Self Administered Scheme. The contributions the company
makes to the SSAS are relived for tax in the accounting year
they are paid and this applied to both regular and single contributions
as long as these payments are within maximum funding rules.
Since 1 June 1996 a company can receive corporation tax relief
in the accounting year that a single contribution of up to £499,999.99
is made to a SSAS (this includes any regular contributions made
during the year to the SSAS) as long as this contribution is
justified by the scheme actuary. For amounts of greater than £500,000 or 210% of the contribution paid in the previous period
the corporation tax relief will be spread over 2 or more accounting periods
as follows:
SSAS tax relief spreading
Special contribution
Spread amount
£500,000-£999,999.99
2 years
£1,000,000-£1,999,999.99
3 years
£2,000,000
plus
4 years
By making special contribution the company can reduce the profits
it makes or even make a loss for that accounting year. This
loss can then be used to offset profits made in the accounting
year immediately preceding, as long as this contribution is
justified by the scheme actuary. The trustees should review
the SSAS position 2 months before the end of the accounting
period. Any unexpected company profits could then be applied
through the SSAS for tax planning purposes.
If an over funding situation is created by this special contribution
the PSO may require the surplus repaid less 35% tax if other
methods of reducing this surplus are not applied.
Pre 1989 contracts
Many sponsoring companies will have converted an pre 1989 EPP
contract to a Small Self Administered Scheme and this offers attractive planning opportunities
for retirement. Under these contracts where the SSAS is using
the existing trust under the previous regulations, the final
remuneration is not subject to the earnings cap.
The retiring member must use the annual remuneration from the
3 consecutive years that produce the best average for final
remuneration. This means that forward planning could significantly
increase the maximum amount that could be paid into the SSAS
at retirement that can increase benefits to the member and reduce
or eliminate corporation tax for that accounting year. Alternatively,
the retiring member can consider remuneration earned over the
past 13 year period to find the best 3 consecutive years.
Taking benefits
Due to the nature of the underlying assets in the Small Self Administered Scheme pension
fund such as commercial property, the Inland Revenue allow the
SSAS flexibility in the way the trustees can provide pension
benefits to the members and survivor. This flexibility is allowed
because it can be difficult to realise a market value for a
property if it must be sold quickly to provide a SSAS member
pension benefits.
Most SSAS arrangements will allow income drawdown of benefits
as long as they comply with various rules. The trustees must
purchase an annuity by the member's 75 birthday although an
annuity to provide the pension income can be purchased at any
time from retirement age to age 75. The trustees must also review
the annuities market to determine a suitable time to make purchase. Once purchased an annuity it cannot be changed, so learn more about pension annuities and secure a personalised annuity quote offering guaranteed rates.
The actuary must ensure that the level of pension income in
drawdown can be maintained by the SSAS assets and this forms
part of the actuarial tri annual review of the SSAS. The actuary
must also ensure that the pension income paid to the member
is within 10% of market annuity rates.
As long as there are enough assets in the SSAS pension fund
to provide the member with an income between the age of 70
and 75 of an equivalent pension annuity, the SSAS can continue to invest in commercial property.
However, loans and borrowing will be restricted by deducting
those assets from the SSAS pension fund earmarked for the member's
retirement benefits before the 45% asset value limit can be
applied.
If the member dies during income drawdown, the dependant's pension
can be funded from the Small Self Administered Scheme as income drawdown until
the dependant's 75 birthday or the date the member would have
reached aged 75. For death benefits attached to the SSAS, where
these are greater than the member's share of the SSAS pension
fund the trustees must insure the surplus with a life cover
plan.
