9th September 2019
Should I set up a Self Administered Pension?
Is it a bird? is it a plane? No, its a Small Self Administered Pension Scheme! I frequently get asked by listeners and readers about funding into a Self Administered Pension. There seems to be a lot of confusion about what it is, or indeed isn’t, and who they are or aren’t well suited to. So that is this weeks’ objective, to answer these very queries. I hope it is of use.
My father used to shoot. He’d go out with his busted oul shotgun with the stock taped on with insulation tape! He’d walk around fields for what seemed like days at a time, coming home with the occasional pheasant! As frowned upon and macabre as that may seem to some today, when you are from the midlands of Ireland that was (and remains) the equivalent of golfers hunting for birdies today! I remember vividly the first time he took me out shooting. Being fiercely animal-centered I wasn’t up for shooting any live animal, but I do remember taking my first shot with a shot-gun in the wilds of Kilkenny. Aiming for a tree, with nerves and an unsteady hand (I was 10!) I let fly a cartridge, missed the tree and very nearly shot a passing duck. Luckily he passed unharmed, but that was essentially the beginning and the end of my shooting career! Whenever I see a duck these days I’m reminded of that fond memory.
If It Looks Like A Duck, Quacks Like A Duck, Its A Duck!
A Small Self-Administered Pension Scheme (SSAS) is just that, a pension, which is small in number of members, and which is self-administered! There are lots of misconceptions about what they do and don’t do. If you like detail then I strongly suggest reading this, Chapter 19 of the Revenue’s Pension Manual. That will keep you going for a while! It might also help answer the question; should I set up a Self Administered Pension?
I get a lot of questions about Self-Administered Schemes, so here are some of the typical questions I get asked about them, and a broad answer to help get some clarity around them.
What is a Small Self Administered Pension Scheme?
Simply, it is an Occupational Pension most often set up for a single Director of a Limited Company. It is approved in it’s own right by Revenue (Revenue Approved) and contributions are invested as per the wishes of the Director, and in line with pension rules.
Who Can/Should Set Up A Small Self Administered Scheme?
Technically anybody can set up a SSAS! It might not be of great benefit to most, but they technically can set one up! Typically it is directors of businesses that opt to establish such schemes as a way to fund for their retirement income, and to control how and what and when they invest the funds. It is run by the director/employer and not a traditional pension provider. It is an alternative strategy to traditional pension products, and one that is quite attractice to many.
Who Is Involved In A SSAS?
You are obliged to hire an independent Trustee to have official over-sight on the scheme and to ensure timely annual reporting, and that you behave in line with legislative guidelines! If you want to invest the funds (you will!) you will need to then select who and how you want to do this. There are 2 platforms available in Ireland that allow access to low cost index funds etc through such schemes. You can also use traditional brokerages and companies to invest in funds or funds of funds. You can also then invest in property directly, be that residential or commercial properties. Legislation governs how and what you can do in this regard (more on that in a coming episode!). You may also likely opt to work with an advisor to help you determine the overall strategy, to execute the strategy and then to monitor and manage it over the long term.
What Are The Fees In A Self Administered Scheme?
You will pay your Trustee, you will pay your fund platform/vehicle and you will pay your advisor. I have seen fees range from as low as 1% on such structures to as high as 4%, it totally depends on the amounts, the parties you engage and the strategy you adopt. For example when it comes to Trustees, some might charge a flat fee of say €3,000 to €5,000 per year, while others might charge 0.2 or 0.5% of your funds. The amounts involved will determine what you end up paying in total.
What Are The Advantages Of A SSAS?
They are many, but again that depends on your situation as to how relevant and beneficial they may be to you! Our example at the end may shed some light on a typical example where it can be of real value for some. Headline benefits are the obvious ones; total transparency on costs, total control on strategy, corporation tax relief on contributions for your company, no benefit in kind, trustee remains the owner of the funds at all times, generous revenue allowances, access to whole-market investment options, funds, indices, property and even deposits accounts!
Why Should I NOT Set Up A SSAS?
If you are not going to utilise the above benefits it may not be worth setting up. Depending on the amounts involved it may be more cost effective to stick to a traditional route. Typically we see such plans being of value if current or final pots are heading north of €500,000.
What Happens My SSAS If I Die Before Drawing The Money?
Your dead. On a positive note the full value of your scheme will be used to a) pay out death in service b) provide benefits for your dependants. Revenue are apparently looking at the situation of the max of 4 times salary being paid out via death in service.
How & When Can I Access My Self Administered Scheme?
Officially 60 is the earliest but you can work it to get access to your scheme at 50. You can access it in the same way as any other Occupational Scheme, the most common route currently being taking 25% tax free (max €200k tax free with potential for another €300k at 20% if have €2m pot!) and then the balance goes toward generating an annual income via an Approved Retirement Fund (ARF) or Annuity.
How Do I Set Up A Small Self Administered Scheme?
You can talk directly to an independent trustee or financial advisor that has experience and competence around the topic. It can be a super option for some, and not all a super option for many. If it suits though it can be a cracker!
How Much Can I Contribute?
There is little debate that a Self Administered Scheme stands to benefit business owners or directors owning more than 20% of the company in which they work. Reason being, there are significant allowances for the company to make contributions to the scheme for the Director. In Blog79 we explored some of these allowances. If you have significant reserves built up in your company, availing of these allowances can be one leg of a very very tax effective stool!
In typical style, lets explore a scenario, digging into the numbers, and share a common scenario that I witness with clients. This practical example hopefully helps outline some significant opportunities that might apply to you if in this situation. If you’re not currently in this situation but wish that you were, well what are you waiting for!!?
Sinead is a (truly fictitious) 45 year old director of ‘Duck n Roll Ltd.’ which supplies aromatic duck kits to Chinese restaurants in Ireland. She set up the company in 2010, and has been taking a salary since 2011. The company has been contributing to a regular PRSA on her behalf for the last 5 years. On the basis of advice she got at the time the most the company could put in was €800 per month. Her pension has a value of €53,000 today. The company has been very successful, building up reserves of over €500,000 and generating net profits of €100k per year. Her salary is €60,000.
Sinead is happily married to Sheldon, who is the same age as her. The ‘happily’ aspect here has no impact on the numbers by the way!
Important to note that if an employer is contributing to a PRSA on your behalf, as in this case, that it counts towards the maximum allowable based on your age. The company is hamstrung to contributing a comparatively low amount. If an employer is contributing to any form of ‘Occupational Scheme’ the limits are very different, and are based on a different set of criteria; age, wage, marital status, previous pension benefits and planned retirement age. This is where the scope for Directors becomes really attractive indeed! Lets see how it works for Sinead.
Under a Self-Administered Scheme (which is a form of Occupational Scheme) the scope for ‘Duck n Roll Ltd.’ to contribute to Sinead’s pension pot. The company can follow one of two routes to maximise her pension, as governed by Revenue limits based on her age, wage, marital status, previous pension planning and her planned retirement age of 60.
Option A: Contribute €399,000 as a ‘One-Off Special Contribution’ and €52,000 per year between now and age 60 for Sinead.
Option B: Contribute €81,000 per between now and age 60 for Sinead.
If she achieves an average of even 4% net return after fees on this type of strategy she could realistically expect to have a pot of €1.7 to €1.8m at 60 years of age in her Self Administered Pension scheme.
With both options the company could/should be able to claim full Corporation Tax relief. If not this year then spread out over a max of 5 years. Money out of her company completely free of tax or Benefit In Kind, and into her OWN scheme, AND the company gets Corporation Tax Relief! Too good to be true surely? No, this is totally legit. Revenue rules allow the company to fund a pot that will likely (based on Actuarial assumptions) generate a pension income of 2/3rds a directors final salary. That is the limit, the maximum, hence the large projected pot size for Sinead.
When you compare that to her ‘original’ scheme standing to achieve a final pot value of €287k at 60, there is a marked difference in the outcomes.
Within a self administered she has control over what and how to invest these funds over time, within revenue rules obviously, and under the watchful eye of a competent independent trustee! She can invest in any combination of different regulated investments, with any number of different providers, which really does open her options to ensuring she gets access to the very best options.
Now obviously it sounds great to achieve a pension pot of €1.8m, but that is totally dependant on her company having the ability to make these levels of contributions for that amount of time. No mean feat! Self Administered Pension Schemes have often got a bad-rap in the past because they were associated solely with people who would use them exclusively to buy property – and we know what happened property here. Now however they are being utilised by more and more investors as a means to get access to platforms, index funds and yes sometimes a blend of property, in a more controlled, transparent and cost effective way to the traditional pension routes.
In addition, as we know, Retirement Planning is not just about whacking money into Self Administered Pension schemes, there are alternative and complimentary options that need exploring. Entrepreneur Relief, Retirement Relief, potential spouse benefits, and other tax efficient options remain available.
No matter what way you dice it however, if you are a proprietary director, and have cash in the business, you’d be ‘quackers’ to not at least be aware of the avenues open to you! I sure hope that this article was of value to you in determining; should I set up a Self Administered Pension. If and when you need a trusted advisor to help with your own retirement planning please do check out the Work With Paddy section, and get in touch via the form below if we might be a good fit.
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