Setting pension schemes on the right footing with Small Self Administered Schemes
A while back we wrote a blog that discussed how SSAS clients can be helped with tricky problems in order to set their pension scheme on the right footing and preserve the tax privileged funds for future generations. This is the second of our tales showing how this can work in real life.
Give an old SSAS fund a home
“Terry” (not his real name) came to us following some correspondence with accountants, when the company was being sold. His pension scheme was a SSAS which had several members, all of whom were Terry’s family, which had a large section of its funds which had not been apportioned between the members of the scheme when the contributions were made.
To give an idea of the timescale, the contributions were made before 5 April 2006, in a period where the default for a SSAS was that members had a 'common' trust fund. This was a condition for the old HM Revenue & Customs approval regime. Since April 2006, the nature of the Lifetime Allowance and the taxation on assignment of funds is such that members always have a defined share of the fund, which needs to be worked out equitably.
"Care is needed to make sure allowances are not breached and, of course, the interaction with any useful protections such as Enhanced Protection"
There are still schemes that have funds contributed by an employer that have not yet been allocated to specific members. This may have resulted from funds built up prior to 5 April 2006 that had to be surrendered to allow for Enhanced Protection, or contributions paid since then that simply have yet to be allocated. The application of the rules for each scenario is slightly different. Care is needed to make sure allowances are not breached and, of course, the interaction with any useful protections such as Enhanced Protection.
At first, the solution looks simple: why not just decide which members will get what, and apportion the funds accordingly? In Terry’s case, though, because their property investments had been successful, the fund shares of all of the members were at or above their Lifetime Allowances, and each member had registered for various forms of protection against the Lifetime Allowance charge. Understandably, the preference was not to disturb this, so it seemed we were faced with the unusual prospect of there being a sizable amount of money that people did not want as much as you might normally expect them to. So we needed to give it some thought.
"We were faced with the unusual prospect of there being a sizable amount of money that people did not want as much as you might normally expect them to"
Authorised Surplus Repayments made from a SSAS would typically be made to a connected company triggering a tax charge at source, following which the net funds are for the company to use or distribute. This is where formulating a strategy in conjunction with your accountant can be useful, as this still may offer useful solutions in some cases.
We were asked to provide consultancy to help the trustees reach a solution. We had historically had confirmation from HMRC that unallocated funds arising from pre April 2006 contributions can be apportioned between the members without restriction. However, that did not get us round the issue that any member to whom funds were apportioned would lose protection from the Lifetime Allowance and breach the Lifetime Allowance (or breach it more severely) in the future.
Protecting the fund by giving up protection
For this particular client, we discussed the practical impact of loss of protection. One of the members “June”, had just reached their 75th birthday. June had substantial funds already, well in excess of the Lifetime Allowance, but her test against the Lifetime Allowance at age 75 had already been carried out as required. June benefited from “Enhanced Protection” and hence had no tax charges arising from the Lifetime Allowance test.
The obvious consequence of June being allocated these funds was that she would lose her Enhanced Protection. However, a key point about the Lifetime Allowance is that for members with drawdown pensions, there are no further tests of funds against the Lifetime Allowance after age 75. So, that being true, in this particular case, this meant that there should be no adverse tax consequences were June to lose her Enhanced Protection status.
The solution is not a complete “with one bound our hero was free”. Since June is over 75, then on her death, any funds paid out as lump sums or pensions to her beneficiaries would be exposed to tax when withdrawn. On the other hand, the timing of those withdrawals can be decided by the beneficiaries to suit their tax positions, and the funds might not even be used by that next generation, as they could in future be cascaded to future generations, while remaining in a tax privileged environment.
For more information about this topic, please contact your usual Barnett Waddingham consultant. Or you can get in touch with me below.
Please bear in mind that the SSAS team do not provide regulated financial advice. So while we can help with the repair work, we cannot provide guidance on what might be the most suitable investments, or course of action regarding benefits, for individuals.
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