SSAS vs SIPP: Which Is Better?

SSAS vs SIPP: you know they are both tax-efficient pension schemes. But which is better for you and your finances? Essentially that comes down to how much control and flexibility you want, as well as whether you want the freedom to invest in your own company.

Firstly, here’s a summary of the key differences of SSAS vs SIPP. Below that we will look at the nuances of each pension scheme in more detail.

What are the key differences of SSAS vs SIPP?

SSAS:

• usually a scheme managed by an employer for directors and employees
• greater investment flexibility and control
• can lend money to the sponsoring company
• pension members are usually trustees
• cost-efficient for directors and other employees.

SIPP:

• a type of personal pension that’s open to anyone
• loans to any company associated with the member are not allowed
• SIPP provider usually acts as the trustee.

What is a SSAS (small self-administered scheme)?

A SSAS is a type of employer pension scheme. It gives you a lot of flexibility in where your money is invested. Because all members of the scheme become trustees, you will always have a say in the investment choices that are made. SSAS pensions are normally set up by the directors of a business and provide the option to use the pension pot to invest in the business while giving employees a tax-efficient way to save for their future.

What is a SIPP (self-investment personal pension)?

A SIPP is a personal pension plan. The investment pot is made up solely of your contributions. Likewise, you alone (with the help of an adviser) decide how to invest your savings. SIPPs are set up by insurance/finance companies or specialist SIPP operators. Your employer can contribute to your pension and make payroll deductions on your behalf.

What about eligibility?

SSAS members are usually staff or directors of the company that set up the pension. A SSAS must have no more than 11 members at any one time, so membership is usually reserved for directors and/or senior staff and their immediate family.

Unlike a SSAS, SIPPs are open to anyone. They are used by everyone from young savers to board-level executives. However, it’s important to note that SIPP providers have a specific set of eligibility criteria. These are often based on a minimum fund size due to the higher costs involved in running a SIPP in comparison to standard pensions.

Who has control of the pension?

With a SSAS your employer assumes overall control of the scheme. Each member is a trustee and contributes to investment decisions. Conversely, a SIPP is controlled by the scheme provider – although you have the ultimate say on investment decisions.

Do you want to be responsible for admin?

The trustees of both SSAS and SIPP schemes have duties they must fulfil for HMRC. In the case of a SSAS, where each member is a trustee, a scheme administrator will be nominated to complete the trustee duties. With SIPP schemes the SIPP provider is the trustee and will handle the HMRC responsibilities on your behalf. (Some SIPP schemes will allow you to become a joint trustee, but often that’s unnecessary).

The duties of a trustee/scheme administrator include:

• Registering with The Pensions Regulator and providing a regular scheme return
• Registering the pension scheme with HMRC
• Reporting events relating to the scheme to HMRC
• Providing information to scheme members regarding lifetime allowance, benefits and transfers
• Paying certain tax charges.

In this context, the choice between a SSAS and a SIPP depends on how much hands-on involvement you want with the administrative side of your pension. With a SIPP, a financial expert manages the admin on your behalf; with a SSAS you take care of everything in-house, although most members choose to appoint a professional trustee to manage the administration for them.

What can you invest in?

If you want flexibility when it comes to investment choices, a SSAS is the more logical choice. Unlike SIPPs it allows trustees to invest in the business running the scheme. In effect: employees invest in their employer. (More on that below.) Investment choices are jointly decided by all members of the scheme and registered in their names.

With a SIPP there’s still plenty of scope for a wide portfolio of investments. But you will be subject to your SIPP provider’s choice of “allowable” investments. These will vary from one provider to another. All investments in a SIPP scheme will be registered in the name of the SIPP trustee’s company.

Investing in your company

With a SSAS, the directors can draw on the pension pot to invest in the company. That option isn’t available with SIPP schemes. This is one of the major points of difference in SSAS vs SIPP. So how does it work?

A SSAS scheme enables the employer to loan money from the pension pot (up to 50% of the value of the scheme’s net assets). Interest is payable at a ‘commercial rate’, the loan is repayable over 5 years and first charge security is required. Loans are not allowed to individual members of the scheme or anyone related to them. There is no limit on loans to unconnected third parties and the terms can be determined between the members and the borrower.

With a SIPP, you cannot use your pension savings to loan money to yourself or any company you are connected to. However, you can choose to loan up to 100% of your pension pot to unconnected third parties.

If you are a director looking for a tax-efficient way to invest in your business, a SSAS offers you benefits that aren’t available with a SIPP.

Investing in shares

Of course, loans are not the only way to bring money into a company. With a SSAS you can use up to 5% of the pension fund to buy shares in your business (or your employer’s business). With a SIPP up to 70% of your pension pot can be invested in shares of any company, providing it meets your SIPP provider’s investment criteria. If the company you invest in is your own or one you are associated to, tax charges will most likely apply.

What are the tax implications?

Both SSAS and SIPP schemes are tax-efficient ways to save. You are entitled to tax relief on your contributions, there’s no income tax or capital gains tax on investments and you will receive a tax-free lump sum when you retire (aged 55 or older). Any income thereafter will be taxed as income.

Is your money safe if the scheme is terminated?

Yes (partially) with a SSAS, no with a SIPP.

With a SSAS non-allocated funds can be returned to the business if the scheme is terminated. These funds will be taxed at 35%. With a SIPP there is no refund of contributions if you decide to terminate your scheme. If your SIPP provider does release the funds before you reach the age of 55, there will be a heavy fee to pay as well as a tax of around 55%.

Need advice?

Pension decisions are incredibly important. They can also be incredibly complicated. You can come to us for straight-talking, independent advice on the pension schemes that are best suited to your particular financial landscape and career ambitions. So, you can get back to doing what you’re best at.