A Level Playing Field?

David  Baker Wealthtime


22 May 2007

We hear a lot about the need to create a level playing field in pensions as in most other areas of life!  This usually means in practice that the more glaring anomalies are dealt with and the apparently minor ones are left to sort themselves out.  In other words nothing is done about them.  Yet such anomalies can have quite far reaching effects in some cases.  I suspect this may well turn out to be the case with SIPPS and ASP.  Now that the dust has settled and the oppressive tax penalties for dying after the age of 75 are set in stone, people will start looking for ways round it.  The obvious one, if you have a limited company available, is to set up a SSAS and transfer your SIPP Fund to this.  That act alone immediately creates a common trust fund  which means in essence that your entitlement to benefits is pooled with those of all the other members of the scheme, assuming of course that there are other members to share it.  This simple concept applies in fact to the majority of pension schemes including large final salary schemes, but there it is of no practical importance in the context of the passing of funds on death  which is of course of critical importance to SSAS and SIPP clients because there are no funds to pass on the pension just ends, and a spouses/dependants pension is payable thenceforth depending on the circumstances. 

With SSAS unlike SIPP it is therefore possible to pass funds on within the scheme.  All that is needed to achieve this is to ensure that there are other members of the scheme and that you want those other members to benefit.  In practice this usually means members of your family, but that does not necessarily have to be the case.  So by creating a SSAS instead of your SIPP and bringing in other members of your family your fund can be reallocated to them not just as your dependants but to them in their own right.  This enables the fund to be passed down the generations in a tax free environment however long you live, albeit you do not have the freedom to use the monies that you would have had if you had taken benefits.  This contrasts with a SIPP where there is no facility to create a common trust fund  it is by definition a one person scheme. 

The result is an unfair anomaly. One applauds the fact that SSAS still possesses this flexibility but abhors the fact that SIPPS do not.  The government has talked vaguely about addressing this but in practice it is difficult to see what can be done without changing trust law.  The common trust fund is a trust concept not a pensions concept and to try to restrict it in the context of SSAS, presumably by requiring the specific earmarking of a member?s funds from inception, without also impacting the concept as it applies equally to large final salary schemes could be very difficult to achieve.  Pensions are an important aspect of tax planning and should not be subject to arbitrary differences in this way.  SSAS and SIPP are in practice very similar even though the legal framework is different.  One could even create a SSAS by setting up effectively a shell company - say a management consultancy  just for that purpose.  This is unfair. 

The other major difference between SSAS and SIPP is in their treatment by the FSA.  The former is not regulated, the latter is.  Yet, the two concepts are in practice very similar including in the way they are administered.  In both cases a professional organization sets up a pension scheme for the client to enable that client to do their own thing on investments in a tax efficient way.  One client is a company, the other an individual but since most small companies are effectively controlled by an individual the two concepts, though legally different, are in practice pretty much the same.  Regulation is a big burden for SIPP operators.  They used to obtain exemption from this because they also acted as trustee, but the regulations have removed that exemption.  One can certainly argue it is right to regulate SIPPS because of the amount of money they control, but really the same arguments apply to SSAS.  The fact that SSAS members are also trustees does not make any difference- they could equally be trustees under the SIPP, which would still have to be regulated. 

They even have a joint professional body the Association of Member Directed Pension Schemes.  Many of the members run both SSAS and SIPP and many clients switch between the two so it is illogical that one half has to bear the burden of regulation and the other does not.  These issues need to be addressed.  A Day should have been the time we all moved to a level playing field.  It is time these historical differences were eliminated and the industry's ingenuity in exploiting loopholes applied fairly!

 

This article represents the personal views of David Baker and is not intended as a substitute for professional financial advice. 


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