What is the difference between a SIPP and a SSAS?
Qandor member and director of Burlington Wealth Management, George Ttouli shares some insight into the differences between SIPP and SSAS.
In my dealings with property professionals over the years, I have often heard talk of buying commercial property through a SIPP (self-invested personal pension) or a SSAS (small self-administered scheme). Everyone seems to know this is something to do with using pension money but not everyone understands the intricate details.
So here it goes: essentially, they are both types of pension and the underlying tax rules are the same for both, but the legislation is applied slightly differently.
It is important to understand that a SSAS is a small occupational pension scheme set up by the directors of a business that wants more control over the investment decisions in the pension scheme. A SSAS has members who have pension benefits building up within the SSAS and is controlled by Trustees, usually the Directors. A SIPP on the other hand is a personal pension scheme for an individual. The individual is the legal owner of their pension pot and can make their own investment decisions. In both cases directors and individuals can decide how to invest the pension fund. There is a list of approved investments provided by the pension regulator and this of course includes commercial property. Please note the commercial property has to be exclusively a commercial freehold and there must be no residential aspect to it. In the case of a residential flat above a shop the legal titles would have to be separated and only the commercial aspect could be owned by the pension fund.
So if the SSAS is an occupational scheme, it is therefore owned by the sponsoring employer. The members are usually the employees or directors of the company. There is no limit on the number of members but historically the schemes are designed for small owner-managed businesses so as the name suggests the members tend to be relatively small. Each member has a proportion of the funds in the SSAS based on their contribution and this could include shares in the value of commercial property, money held in investments and of course the pension bank account.
So a SIPP is just a personal pension owned by an individual and who would normally instruct a specialist SIPP Trustee to oversee the running of the scheme. These trustees will have charges and a typical minimum fund size is £100,000 to make the SIPP viable.
In both cases contributions can continue to be made by employer and employee and also both pensions can receive transfers in from other pension schemes.
There are some further key differences which I would like to highlight below. A SSAS can lend money back to the sponsoring employer. Whereas a SIPP cannot lend any money back to the member or the individual. This is strictly prohibited and is often confused with the fact that the SIPP can borrow to make a potential investment. The SIPP can borrow up to 50% of its fund value but of course the borrowing stays within the SIPP and is used just to facilitate an investment like a commercial property. This is very different to the SSAS lending money back to the sponsoring employer who can use that money for its own business purposes.
A SSAS can also place funds into the sponsoring employer by investing up to 5% of its fund value in the purchase of shares in the sponsoring company. This is simply not possible within a SIPP, and although a SIPP in theory can invest all of its fund in the shares of any one company, there are strict rules about investing in companies owned or controlled by connected parties.
Loans made by a SSAS to the sponsoring employer must be charged a commercial rate of at least 1% above the Bank of England base rate and a repayment strategy must be put in place to repay the capital and interest within five years.
We have in the past helped clients set up either a SIPP or a SSAS, whichever is appropriate for them for the express purpose of purchasing a commercial property owned by the client directly as an individual or through their own company. This is an indirect way of accessing funds from an individual‘s pension for personal use. Of course the property sold to the pension is now owned by the pension and all income derived from that property is owned by the pension for the member’s long-term benefit.
In both cases pensions offer excellent tax efficiencies. Firstly, any contributions made will receive tax relief. Secondly, there is no income tax charge on investments held in pensions. Thirdly, there is no capital gains tax when investments are sold within a pension. Fourthly, there is an option to take a tax-free lump sum at retirement, usually at 25%.
Access to funds is not allowed until you have reached the age of 55 and I believe this will change as the state pension age changes in the not too distant future. After the first 25% that is available any other drawings are taxed at an individual’s highest marginal rate of income tax.
As you can see, clearly this is a complicated area and I’m bound to say that a specialist financial advice should be sought before any decisions are made. Obviously, I’m happy to discuss any scenario with any member in the strictest confidence.
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