When it’s time to trade a SIPP in for a SSAS

18 Jun 2021

Small self-administered schemes (SSAS) had been around for 17 years before its younger brother self-invested personal pensions (SIPP) got here in 1990, offering many of the investment freedoms SSAS members had been enjoying but without the need for a sponsoring employer.

SIPPs have proved to be a great starter pension. Over two million have now been written and they have enjoyed healthy growth in contribution levels throughout the pandemic as lockdown has curtailed consumer spending.

Advisers know product selection must be driven by client needs and that those needs change over time. So, does there come a time in the life of a SIPP when it should be traded in for its older brother SSAS?

I have been seeing this happen in small companies where several directors each have separate SIPPs and they are ready to take their company to the next stage of its evolution. With a business that is well established, it can make good sense to tie the pensions back into the employer.

The initial choice of SIPP may have been driven by a ‘don’t keep all your eggs in one basket’ mindset, considering one-in-five start-up businesses fail in their first year and their casualty rate remains high thereafter. But if the funds in the SIPP have grown well, now may be the time for the pension to help the sponsoring employer with a leg up to the next stage of its story.

Pooling Power

Rather than have multiple SIPPs buy a property, with potentially multiple conveyancing and arrangement fees, this could all be achieved as a single purchase if the directors pool their SIPPs by transferring them into a SSAS first.

And if the business needs finance to grow, then by converting those SIPPs to SSASs, a loanback can be made to the sponsoring employer – something that would have been out of the question with SIPP money because of the prohibition of transactions with connected persons.

Often, as businesses mature, one of the early partners will want to leave. Those with the most entrepreneurial spirit will seldom be satisfied as a business transforms from rapid innovation, to farming and cultivating an established client base. The other directors can use the funds in the SSAS to buy out the shareholding of a departing business partner, within the limit that the shareholding in the sponsoring employer must not exceed 5% of total SSAS assets.

A note of caution here: the complexity of pension rules has grown rapidly since the Finance Act 1973 and Joint Office Memorandum 58 launched SSAS into the world. So an independent professional administrator and an independent trustee, while not strictly necessary, is indispensable.

SSAS houses are also seeing market consolidation, with the market share of the top 15 providers increasing, as a long tail of small players exit rather than invest in up-to-date technology to streamline service provision. Those moving from SIPP to SSAS will want to pick a provider that’s committed to serving the SSAS market for the long-term.

by Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas.
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