Over recent weeks here at Holborn Assets, we’ve weighed up both personal and workplace pensions. Now let’s look at pensions from the point of view of the workplace pension provider. If you’re running an SME, that might mean you! And your staff are waiting for a pensions solution.
If you are a SME owner and need to put together an employee pension scheme, you’ve got questions to answer:
What types of scheme are available? Have you worked out your profile when it comes to flexibility and cost? Do you want to use your new pension scheme for specific corporate ends, such as provide your SME with a loan?
There are three main types of employee pension scheme available: SSASs, SIPPs & Stakeholder schemes.
All offer the following tax benefits as standard (or at least in highly-similar form):
- Company and employees contributions are deductible or have tax relief (within limits).
- No income and capital gains tax for the allowable investments (‘allowable’ varies between pensions).
- A tax-free lump sum either on retirement (55 years old onwards) or on death before retirement.
Beyond these core advantages, let’s look at what makes each of the three main types of workplace pension stand out:
A Small Self Administered Scheme (SSAS) is a pension trust set up typically by private and/or family-run companies. A SSAS can have only two members – ie. the directors – or up to 12 members, including the founder. The SSAS must, however, effectively serve all the members, all of whom are trustees. Providers, however, typically act as the ‘professional’ trustee.
SSASs can be a vehicle for various company requirements, including:
- purchasing commercial property to be leased back to the business.
- loans to the company owner.
- ‘in-specie’ transfers of assets from the owner, or owner’s family; as well as buying and holding equity in the company itself.
The lending aspect is the unique feature of the SSAS. The pension can lend up to 50% of its value to the company at interest, secured by an asset such as a property – potentially a very useful alternative to credit from banks. The pension can borrow up to 50% of its value to fund major company purchases, such as the property.
SSAS providers charge an annual fee for running a two-person scheme, typically between £500-2,000, though fees vary relating to: set up, adding more members, borrowing, loan-back, purchasing property, contributions, scheme valuations and death claims. Some providers waive these extras and others don’t, so it’s vital you compare the full breakdowns. Also, bear in mind that the fee structure offered might only extend to less than the full 12 possible.
Self-Administered Pension Schemes (SIPPs), while also trusts, differ from SSAS in that the SIPP provider is sole trustee in most cases. This can make commercial property purchase more restrictive because the provider/trustee holds sway.
A group SIPP gives each member their own account whilst being overall a single investment pool requiring a trust deed to establish. The idea is to have all the flexibility and options of a regular one-person SIPP, and to allow members to self-invest immediately. Many small business owners prefer SIPPs to avoid the SASS hassle of not being the trustee .
SIPP costs vary from a few hundred pounds to more than a couple of thousand. The range is broad because capital adequacy requirements were imposed on SIPP providers last September, bumping up the set-up cost for some by including a capital adequacy charge. As with SSAS, the ongoing charges require scrutiny. Some more competitive providers argue that you should only pay for the features you use.
3. Stakeholder pensions
Stakeholder pensions focus on simplicity and cost efficiency – potentially most attractive to those without pressing commercial property or borrowing requirements.
Stakeholder pensions are scaleable to an unlimited number of employees. They offer a default investment portfolio for company owners happy for a balanced, low-risk underlying investment. The provider claims tax relief at the basic rate and adds it to the scheme.
Either employees contribute to the company scheme, or the company can contribute to a new employee’s personal scheme.
There are limited running costs, including zero charges for transfers. There are only a limited range of funds from which to choose.
So, as an SME owner looking for a workplace pension scheme, an outsourced SSAS can provide your SME with a loan – whereas SIPPs are your option if you want to stay in-house. Try Stakeholder schemes for a low-cost option.