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The DB SSAS: Who bares wins?

It’s commonly known that there are increasing numbers of business owners that would prefer to pay company contributions for their key Directors but are frustrated by the restrictions. Clients would have been informed that options such as Defined Benefit SSAS (DB SSAS) provide the means to offer a more valuable future pension for limited company business owners – a powerful way to convert company wealth to pension wealth.

A DB SSAS is a SSAS that operates pension inputs each year via targeted Defined Benefit pension provision, rather than the more conventional current Money Purchase (Defined Contribution) rules, and is able to use well established and defined pension rules and principles to produce powerful pension planning results.

It is undoubtedly a very specialist product and certainly not right for every client. But where the adviser determines that the member’s profile makes it the right fit, it can be a very powerful solution indeed – allowing the company to reward their key employees with a significantly valuable long-term defined pension benefit for retirement.

Most people agree that from a tax efficiency perspective there are few more attractive forms of investment vehicle than a pension. (Note a pension is not an investment.)

Government puts a strict limit on how much money can be invested in that way (£40,000pa) but often it’s forgotten that there are two ways this can be utilised:

  • In a money purchase scheme, it justifies a contribution – in this example £40,000 – as simple as that. £1 contribution for every £1 of annual allowance.
  • In a defined benefit scheme, though, it instead justifies a pension accrual of £2,500pa (with the single company contribution required to meet this significantly larger than £40,000).

The big reveal

A DB SSAS can provide the opportunity for companies to contribute for their Director and other key employees at often up to 3½ x the monetary annual allowance of the member(s).

One note of caution: the DB SSAS should be viewed as a long-term commitment.  Any activity that might seem to undermine this risks tax consequences – for example, making contributions only for a short term, and then transferring out soon after set-up, could lead to penalties.

DB SSAS is a specialist, even niche, part of the market but for the right corporate client it can absolutely be the perfect fit… But how?

The member(s):

  • Personal tax optimisation
  • Enhanced pension accumulation
  • Escalated provision of valuable retirement benefit provisions while company profits allow.

The company:

  • Corporate tax optimisation
  • The ability to provide significantly valuable retirement benefits for their key employees.
  • As long as the company contribution satisfied the ‘wholly and exclusively’ test (and contributions for controlling directors always should) the entire contribution is offset by the accountant against profit to provide Corporation Tax relief.
  • Each scheme is individually approved by HMRC so there can never be any spreading of tax relief over multiple accounting periods for first year contributions – everything can be offset against this year’s profits.

DB SSAS, like all SSAS, requires HMRC registration on a scheme-by-scheme basis and it can take four, five or even six months for this to complete.  Until it does, no contributions could be made by the company. Perhaps now, around five months out from 6th April, might be the ideal time to consider a new DB SSAS if you are planning a contribution for your clients this side of the tax year.

Some DB SSAS specialists believe that it is important to highlight that this is not a mainstream product, and that the HMRC are fully aware that, to many, it looks like a loophole. It goes without saying that it’s important that pension providers and financial advisers have a good grasp of the rules to ensure they advise their clients appropriately.

For the adviser, it acts as a powerful vehicle to recommend and one that most corporate clients and their accountants are not aware exists.

For more articles like this, visit our insights page

About the author

Alan Godbeer, Regional Sales Director, Rowanmoor

Alan Godbeer is a Bespoke Pensions Specialist at Embark Group with over 30 years of industry experience.  As a member of the team he is responsible for adviser relationships in the South West of England, Wales and Northern Ireland.  Before joining Embark he had various specialist roles including Hornbuckle Mitchell, Zurich and L&G.

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