In my first of two case studies (How a Pension Sharing Order could affect your SSAS) we considered how SSAS members’ shares of the scheme assets could change following the implementation of a Pension Sharing Order, where there is sufficient cash (or assets that can be transferred in specie) to meet the SSAS’s liabilities under the Pension Sharing Order.
In this, the second case study, we will consider how the allocation of the SSAS assets between the members could change where there is insufficient cash, or assets that can be transferred in specie, to meet the Pension Sharing Order obligations. We look then at some of the options available to the trustees to implement the Pension Sharing Order.
Implementation of a Pension Sharing Order
Simon, Nicola, Robert and Janet are members and trustees of a SSAS. All the members are under the age of 55, the Normal Minimum Pension Age, and so have not yet drawn any benefits. The SSAS trustees receive a Pension Sharing Order, in respect of Simon and Nicola, which states that 70% of Simon’s share of the SSAS should be allocated to Nicola, Simon’s ex-spouse. It also states that any costs incurred in settling the Pension Sharing Order should be met equally by Simon and Nicola.
The SSAS assets consist of cash held in a trustees’ bank account and a property, which is currently let to the scheme’s sponsoring employer. There has been a plan to use the cash to improve and extend the property so as to improve rental income. The assets were valued at the Valuation Date for the Pension Sharing Order to be:
|Cash in trustees' bank account||£100,000|
|Property leased to the sponsoring employer||£900,000|
The allocation of the SSAS assets between the members at the Valuation Date was:
Simon’s share of the scheme assets at the valuation date was £250,000. The Pension Sharing Order states that 70% of Simon’s share of the SSAS, i.e. £175,000, should be allocated to Nicola as a Pension Credit. This would amend their respective allocations in the SSAS as follows:
Nicola has decided to take an external transfer of her Pension Credit. She would also like to transfer her own fund out of the SSAS to another Registered Pension Scheme Return she holds and cease to be a member and a trustee of the SSAS. The means the trustees will need to fund a transfer value of £425,000 from the SSAS.
Funding the transfer – using existing scheme assets
The trustees could consider using some of the cash held in the SSAS and funding the balance of the transfer value by making an in-specie transfer of part of the SSAS’s property to Nicola’s other Registered Pension Scheme.
The transfer of the cash element may be straightforward. However, the trustees should consider if any of their plans will have to change if the cash is used for the Pension Sharing Order settlement. It may be that they will have to put an investment they were considering on hold, or delay their plans to extend the property to generate additional rental income until sufficient cash can be built back up in the SSAS. It may also mean that other members of the scheme will need to delay drawing benefits from the scheme until there is cash available for them to do so.
The transfer of part of the property may prove to be slightly harder. Whilst it is generally possible for a SSAS to hold property jointly with another party, the Scheme Administrator of Nicola’s other Registered Pension Scheme would need to confirm whether the part ownership of the property is a permitted investment for her pension scheme.
Simon, Nicola and the trustees of each pension scheme would also need to give some thought as to whether the transferring part of the property to Nicola’s other Registered Pension Scheme would work in practice, for example if the divorce has not been amicable. If the property is held jointly between the two pension schemes, Simon and Nicola will still need to make decisions about the property together, alongside the other trustees. For example, they will need to decide to whom they lease the property, the terms of the lease and what Landlord improvements will be carried at the property etc. In addition, they will also need to consider things like how the management of the property will be carried out, who will complete the VAT returns for the property and who will ensure the relevant share of the rent is passed to the two pension schemes.
If the divorce was amicable and Simon and Nicola are happy to continue to make decisions regarding their pension savings together then they may wish to consider whether it might be more cost effective for Nicola to take an internal transfer of Pension Credit and leave her pension savings, including her share of the property in the SSAS. She will still receive the Pension Credit of £175,000 but the funds will be added to her share of the SSAS as opposed to being transferred to her other pension scheme. In this scenario, if an internal transfer was taken, once the Pension Sharing Order has been settled the allocation of the SSAS assets would be:
However, the parties wish to proceed with the external transfer and the Scheme Administrator of Nicola’s other Registered Pension Scheme confirmed that the part ownership of the property is a permitted investment. Solicitors are appointed to deal with the conveyancing. As there is an Option to Tax in place in respect of the property, a VAT expert is appointed to confirm how VAT should be dealt with going forward. A property manager is also appointed to collect the rental income and to ensure that any expenses and rent is allocated between the two pension schemes in line with their share of the property.
Once the Pension Sharing Order is met and Nicola’s transfer value of £425,000 has been paid away, in theory assuming no other investment movements the allocation of the SSAS assets is:
Funding the transfer – selling an asset
The trustees could consider selling part or all the property to raise the liquid funds to make the transfer.
The sponsoring employer currently leases the property from the SSAS. The company may therefore wish to purchase part or all the property from the SSAS, assuming it has available funds to do so. As the sale will be between connected parties, the sale will need to be carried out on arm’s length terms to ensure there is no value shifting between the company and the SSAS. If part of the property is sold, then the net rent the pension scheme receives will need to be adjusted to ensure that it receives rent and pays costs in line with its share of the property.
Alternatively, the trustees could consider selling the property to another party, independent or connected. However, as the trustees of the SSAS are also directors of the company, whilst these roles should be thought of as separate, Simon, Robert and Janet will no doubt want to consider matters in their capacity as directors and what it in the best interests of the company. A change in the ownership of the property may affect the company’s lease of the property going forward. Joint ownerships also need careful planning. For example, a document is needed to outline the shares of ownership and the apportionment of rent and costs. Crucially, this should include provision for how the property would be treated if liquidity is needed to pay benefits from the scheme. There is a commercial benefit from doing that too: if any party can trigger the sale of the whole property, this may reduce the chance of reduced value for those holding minority interests in the property.
If the sponsoring employer agreed to purchase 100% of the property, that would enable the trustees to make a cash transfer to Nicola’s other Registered Pension Scheme. Following the sale of the property and the settlement of the pension sharing order the SSAS assets would then be:
|Cash in trustees' bank account||£575,000|
allocated as follows:
With the SSAS assets held in cash the trustees could consider the types of permitted investments for a SSAS and set new objectives for the scheme investments going forward.
Funding the transfer – borrowing
SSAS are permitted to borrow up to 50% of the net value of the SSAS assets. On the basis that the value of the SSAS assets is £1 million, there is therefore scope for the trustees to borrow the full £425,000 to fund Nicola’s external transfer. The bank or financial institution will likely ask the trustees to use the scheme’s property as security for the borrowing.
The trustees will need to ensure that they have sufficient funds to service the borrowing over the term and the property rental income may help here. The trustees would take on the risk that if the borrowing repayments cannot be met the bank may call in the security over the property, which could have an impact on the members of the SSAS and the sponsoring employer who leases the property.
For example, the trustees might obtain agreement for a £350,000 secured loan from a bank. Once the borrowing is in place they use the borrowing and £75,000 of the cash held in the SSSAS to fund Nicola’s transfer value. Once Nicola’s transfer has been completed the value of the SSAS assets is £575,000, and allocated between the members as follows:
However, the SSAS assets now includes borrowing as follows:
|Cash in trustees’ bank account||£25,000|
|Property leased to the sponsoring employer||£900,000|
All of the SSAS members shares of the assets will be exposed to the borrowing liability. Hence there remains the risk of a fall in the value of their share of the SSAS if the security is called in and they receive less than the deemed market value of £900,000 less the outstanding borrowing for the property.
SSASs are permitted to borrow funds from a connected party. However, the borrowing would need to be carried out on arm’s length terms and the trustees would need to ensure this was evidenced and the borrowing documented.
Funding the transfer – contributions
The sponsoring employer has not contributed to the scheme for several years and is satisfied that it would be granted corporation tax relief on a contribution of £360,000 on behalf of Simon, Robert and Janet. This is in excess of their Annual Allowances and would rely on being able to carry forward unused historic Annual Allowances.
Simon, Robert and Janet have sought guidance from their financial advisers and accountants and are comfortable that they have scope for a contribution of £120,000 each to be made to the SSAS. None of them have Protection against the Lifetime Allowance and their accountant has confirmed that they can take advantage of the carry forward rules to mop up their unused contribution allowances from earlier years. They do not have entitlement to any other pension policy or arrangement and have considered how their SSAS funds compare against the Lifetime Allowance.
Once the contribution has been received there is sufficient liquid funds in the SSAS to fund Nicola’s £425,000 transfer. Once the transfer has been met, the allocation of the SSAS assets will be:
and the assets of the SSAS are as follows:
|Cash in trustees' bank account||£35,000|
|Property leased to the sponsoring employer||£900,000|
In this scenario, Robert’s and Janet’s cash contributions have been used to settled the Pension Sharing Order but in exchange they have been given a larger share of the SSAS’s property.
There may be different options open to the trustees when settling a Pension Sharing Order from the SSAS and these will depend on the individual circumstances of the SSAS. Strict deadlines need to be met when implementing a Pension Sharing Order and these deadlines are relatively short. Therefore, early consideration should be given to the practicalities of settling a Pension Sharing Order, particularly if cash or assets within the pension scheme are not readily available. Each option should be considered carefully. The options may impact the other members of the SSAS and the scheme’s sponsoring employer. Guidance from the SSAS professional trustee and the trustees’ and members’ financial advisers should be sought as early in the process as possible.
You can also read our FAQ page on SSAS and SIPP property purchases.