Pension Planning: Should you go for a SIPP or a SSAS?
For company directors and business owners, there is a range of options in front of you when it comes to your retirement planning. However, you also face a unique challenge to address.
Whilst many people will be focused on their personal financial planning, a business owner/director will need to balance this area of planning with the needs of the company.
Typically, the two main options available are a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). Let’s briefly look at what these pensions offer:
A SIPP is a specific type of personal pension (meaning it is set up outside of your workplace). It is usually set up by a specialist SIPP company or insurance firm.
Almost anybody can join a SIPP if they want to. One of the main differences between this type of scheme and other personal pensions is the greater range of investment choice open to you.
A SSAS is a type of pension scheme open only to the business directors. Here, the members of the scheme usually act as its trustees. Typically, the scheme’s membership tends to be quite small – usually no more than 11 people (although this is not a requirement).
One of the powerful aspects of a SSAS is that the members can use it as a vehicle to invest in their business, using their pension. It is an occupation scheme, not a personal pension. Also, there is a unique range of investment options open to SSAS members compared to a SIPP.
SIPP and SSAS: Comparing the two
The SIPP and the SSAS models might sound quite similar, and in many respects they are. However, there are some important distinctions between the two which company directors should be aware of, well ahead of time:
With a SIPP, the insurance company controls the pension scheme. Each member simply gets to decide on their choice of investments.
With a SSAS, however, the members’ investments are pooled together. This means that each member has a share in all of the investments. In this case, the members (or trustees) make the investment decisions whilst the employer has overall control of the SSAS.
With a SIPP, the provider will not only run the pensions scheme but also act as its trustee. In some cases, a SIPP administrator might allow you to become a joint trustee.
With a SSAS, however, the members are usually appointed as the scheme’s trustees – giving them more participation and control over the pension administration.
With a SIPP, you cannot invest in your own business. With a SSAS, however, the company director can invest in his/her business – using up to 5% of the pension fund to buy shares.
Moreover, if the director owns multiple businesses then the SSAS can invest in every one of them. The condition here, however, is that all of the investments together cannot total more than 20% of the pension fund.
With either a SIPP or a SSAS you are able to invest in commercial property. With a SSAS, however, the director is also able to invest in the company’s premises.
In this case, this would mean that the business’s property would be owned by the pension fund. The business would then be giving rent to the pension scheme, offering significant tax benefits.
With a SIPP, you cannot loan money to the business. With a SSAS, however, you can.
Under a SSAS arrangement, the employer can borrow up to 50% of the scheme’s asset value. The main condition is that the loan must be secured on an asset owned by the business (e.g. its property). Another important condition is that loans cannot be given to other members of the SSAS or to members of the employer’s family.
Which type of pension is right for you?
There are many things to consider when deciding between a SIPP or a SSAS as a business owner.
In most cases, we would recommend you speak with a professional financial adviser to help you navigate the complexities of the two approaches, and discern the best options for your particular goals and circumstances.
Some general things to consider include:
- Cost. Generally speaking, a SSAS will be more expensive to set up than a SIPP. Typical costs range between £500 and £2000. This does not mean that a SIPP is inherently superior, but it means you do need to consider whether the benefits of a SSAS outweigh the additional expense.
- Hassle. It might seem trivial but this is actually very important to think about. Do you want to take on the responsibility of being a pension scheme trustee? For some business owners, the benefits of a SSAS are worth the extra work. Others, however, would be more comfortable if an outside SIPP company took care of things for them.
- Need for cash. Does your business need a cash injection? If not, then perhaps a SIPP would be more suitable. If so, then a SSAS might be a tax-efficient way of getting it.
- Members. Your workforce and fellow directors might make excellent employees. However, that does not necessarily mean they will be good pension trustees. Think carefully about who the SSAS membership might extend to, and whether it could work.
It would be fair to say that a SSAS involves more work on the part of a company director, to set up and administer. However, in many cases, the effort can be well worth it.
The pension landscape often shifts and is difficult for busy directors to find time to get their heads around. By speaking with one of our financial advisers in Lincoln about your pension options, our team here at Castlegate can help you make the best decision for your personal finances and also for your business.
Get in touch today for a free, no-commitment pension consultation.