Is a self-invested personal pension or a small self-administered scheme better for your business?

When deciding what pension scheme works best for a business’s senior employees, employers typically have two main options: a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS). What type of scheme is best for you depends on your business model and why you want to provide this benefit.

In this article, pensions & incentives lawyer Kevin Gude explains the differences between the options and the advantages and disadvantages of each.

Self-invested personal pensions

A SIPP can work well for individuals (the self-employed or other entrepreneurs) who only want the benefit of the investment opportunities that SIPPSs can provide, and don’t mind a third party managing their individual pensions savings within a wrapper that includes many other individuals.

As SIPPSs are commercial products, they can be subject to investment performance fluctuations, fee increases, service level reductions and other contractual changes (for example, where a SIPP provider merges with another, or new regulatory rules are imposed). A member can choose to accept these or incur the time and cost penalties of transferring to another provider.

Small self-administered schemes

A SSAS is created by the employer, for the benefit of between 1 and 11 of its directors and other senior employees (which will often include different generations of a family-run business), as members of the arrangement. It is overseen by those members, as trustees, but they will often appoint a specialist to provide actuarial and administrative advice and support. Importantly though, the SSAS remains the responsibility of the employer and trustees, not a provider.

A potential benefit of SSASs over SIPPs is their use as part of a business’s succession planning while protecting the assets of the SSAS for the benefit of its members. A SSAS is made up of the accumulated pensions savings of its members and, while there are opportunities to link individual members’ rights to specific assets within the SSAS, it is more common to retain those assets in a central pool with individual pensioners drawing down on their share of the fund while the remainder stays within the SSAS.

Unlike when a SIPP member dies and death benefits are paid out to a separate pension arrangement in the name of the beneficiary, a SSAS member’s funds can be kept within the arrangement with the beneficiary invited to join as a member or with the benefit shared amongst existing members. The existing SSAS can then be used as the structure for the payment of death benefits in accordance with the deceased’s member’s wishes without, for example, requiring employer loans to be called in or property to be sold or refinanced in order to meet the large and immediate benefit liability where a death benefit has to be paid out.

As SSASs are run by and for the employer and its employees, there is far less exposure to external forces, although the maintenance of a stable, long-term relationship with the appointed specialist is still important. Conversely, SSASs can be more vulnerable to a less predictable but equally important pressure. As members are often part of the same family (including spouses), and because SSAS rules require unanimity between trustees when decisions are made, marital breakdown or other personal or commercial disagreements between members can sometimes place stresses on the running of the SSAS and how its funds are utilised in a way that doesn’t affect SIPPSs.

Investment rules and costs

SIPPSs and SSASs are subject to largely the same investment rules, with one important exception: while SIPPs must limit their investments to businesses that are unconnected with the member, SSASs are permitted to make HMRC-authorised loans to the member’s sponsoring employer, provided certain criteria are met. These concern sensible details like security, the interest rate and the repayment terms, as well as a practical restriction on the use of residential property as that security, or the employer’s use of the loaned sum to acquire residential property. Nevertheless, it is a valuable option, often exercised by the employer in order to raise working capital and grow the business – an arrangement intended to benefit the SSAS and its members over the long term.

Costs differ depending on how the SIPP or SSAS is to be used, and which provider or other third-party specialist is appointed. SIPPs will often be a more cost-efficient choice than single-member SSASs for individuals who want to make use of available investment options, but for employers who wish to provide a pension arrangement for 2 to 11 employees, a SSAS model may offer a better balance of cost and inward investment opportunity, particularly after any corporation tax deductions in respect of fees and contributions are taken into account.

If you have questions about what pension scheme is right for your business, please contact Kevin Gude.