This month's Martin Tilley Column is written by colleague Alan Godbeer as Martin is taking a short break.
It is likely that by now, to a greater or lesser extent, every financial adviser reading this will have heard about the defined benefits small self administered scheme (DBSSAS), a niche product offered by a handful of SSAS specialists, even if they haven’t all yet recommended one.
A DBSSAS can be a good pensions fit for the right company director clients and those advising them it is a growing area and can help you target a new client sector.
Offering the investment flexibility of a conventional SSAS, while taking advantage of the rules that apply to all defined benefits schemes, a DBSSAS presents powerful solutions that are not possible in a conventional money purchase environment.
For the directors of successful, profitable, cash-rich SME companies, and their financial advisers, it can be the gold standard for bespoke, self invested pension planning. Interest in DBSSAS has increased this year following the increase in the rate of Corporation Tax, a 50% increase in the annual allowance and the abolition of the lifetime allowance.
Let’s look at the basics.
A DBSSAS is a SSAS and they have been providing companies with pension solutions for their key employees for a long time. This year sees, in fact, the 50th anniversary of SSASs. As with all SSAS, a DBSSAS is able to accommodate from 1 to a maximum of 11 active members at any one time and is a pension scheme set up and sponsored by the employer company to provide retirement benefits for key employees, normally (though not exclusively) its controlling directors.
All of the features of a SSAS are there, including secured loan backs to the company and commercial property investment, as well as the support and expertise of a professional trustee that sits alongside the member trustees and a formal scheme administrator.
While it is called, and is, a DB scheme, unlike conventional DB arrangements, it is not linked to members’ salary or service, nor does it provide any guaranteed benefits so there can be no potential future liabilities for the company to be responsible for.
Instead, control sits squarely with the company and their adviser, including deciding year-on-year whether to make additional contributions based on trading conditions and cash and profitability levels. There is no expectation or requirement for future contributions but instead it is an option for the company as and when they choose.
The key to a DBSSAS is what it offers the company by virtue of the DB rules, things that are simply not possible in a money purchase alternative.
• Enhanced contribution potential. By utilising DB annual allowances, contributions from the company of around three times the maximum to a conventional money purchase scheme are typically justifiable. This can be especially powerful for those directors who have focused all their efforts on building a successful, profitable company and are now playing “catch-up” with their pension provision.
• Large Corporation Tax savings. If, as is often the case, the contributions are being made by the company for the benefit of its controlling director(s), the total contribution is offsetable against profits in the accounting year paid to allow Corporation Tax relief at up to 25 percent.
• Adult conversations about future surplus distribution. If the investments in the DBSSAS perform better than the actuaries had assumed, an excess or surplus is created and the company could decide, in consultation with their financial adviser, which member or members would have their benefits enhanced as a result. This can be particularly powerful for family-run businesses.
• Removal or reduction of tapered annual allowance restrictions. The actuarial value of the target pension provided would be considerably less than the monetary amount of any company contribution made to facilitate it, thus reducing or removing the limiting restrictions of the tapered annual allowance.
• Abolition of money purchase annual allowance restrictions. The restrictions of the money purchase annual allowance apply to money purchase contributions but would not apply to company contributions to a DBSSAS.
There are of course downsides to a DBSSAS and it is clearly not going to be the right solution for every client.
It is a long term, complex pension planning vehicle and the adviser would play an important role in ensuring it is the perfect fit, both now and in future years, including possible strategies for at retirement. It is also a sophisticated, specialist scheme for the provider to set up and run with lots of moving parts requiring expert oversight so it is inevitable that fees are going to be greater than for a conventional money purchase arrangement.
DBSSAS is not a mainstream proposition and will likely remain a niche proposition within the range of corporate pension solutions, but for the right company director clients it can represent an invaluable tool in the financial adviser’s kit bag.
Alan Godbeer is sales director at SSAS specialist WBR Group. He has almost 40 years experience in financial services and over 15 years specialising in member-directed pensions. He is writing this column for colleague Martin Tilley who is away.