SSASs remain popular for their broad investment scope and loan-back facility. But flexibility on one hand can lead to complexity on the other, writes Martin Jones, particularly when a SSAS is subject to a pension sharing order
Where a small self-administered scheme (SSAS) is subject to a pension sharing order (PSO), you may find yourself called upon to provide advice and expertise, either to a trustee or to an ex-spouse of a trustee.
Or you might already be advising SSAS trustees, one of whom has indicated they are looking at pension sharing as part of the divorce process.
Given a SSAS is a sophisticated pension arrangement, and given that there may or may not be a professional trustee or administrator involved, there’s a chance you might be relied upon to do a lot of the heavy lifting.
If so, here are three areas where your expertise may prove invaluable.
Scheme due diligence
First and foremost, check whether the trust deed and rules allow for internal transfers in pension sharing cases. This cannot be taken for granted, as many SSASs only allow pension credits to be transferred externally.
In most cases, an external transfer is likely to be preferable given it will create a clean break between the parties, but it is useful to know if an internal transfer is an option.
Also, most SSASs are established with a view to all trustees being involved in the running of the sponsoring employer. Therefore, an internal transfer to an ex-spouse who doesn’t have anything to do with the sponsoring employer may not be consistent with the objectives of the SSAS.
On a practical level, it is also worth trying to ascertain the completeness and accuracy of the scheme records.
“In most cases, an external transfer is likely to be preferable given it will create a clean break between the parties, but it is useful to know if an internal transfer is an option.”
Positive indicators will be an up-to-date trust deed and rules, a complete set of annual accounts, accurate fund-splits, up-to-date HM Revenue and Customs (HMRC) reporting and properly documented benefit crystallisation events.
It will be a lot easier to process a PSO on a SSAS that has up-to-date records than one that doesn’t.
A SSAS allows a broad range of investments, and while a mainstream self-invested or personal pension may be relatively straightforward to value, a SSAS can prove more challenging.
In particular, it may hold commercial property (potentially with borrowing in the scheme), or there may be a loan to the sponsoring employer that is still outstanding.
Both of these are likely to require formal valuations, with the commercial property valued by a qualified expert, which will incur extra administration and costs.
Furthermore, the trustees may need two valuations – one at the beginning of the process when the parties are going to court and one at the end of the process when the pension credit is being calculated.
It is possible that trustees may be resistant to this, but it’s important they obtain accurate and reliable valuations of all assets and at both points in order to reduce the risk of being challenged further down the line.
A good proportion of SSASs are likely to contain commercial property, which is generally perceived as very illiquid, and the property could constitute the main asset of the scheme.
Not only that, the property may be leased to the sponsoring employer, which means trustees will be loath to sell it.
The biggest challenge, therefore, may be liquidity – as without sufficient cash, the PSO may be a non-starter.
Trustees and advisers may have to explore a number of options to give effect to the pension credit. These options include:
- borrowing (more) cash;
- switching assets between trustees’ funds to free up liquidity for the divorcing trustee;
- paying part of the pension credit in specie;
- allowing the ex-spouse to join the SSAS (if the scheme rules permit); and
- selling the property.
Each of these options brings their own considerations. We also know from Pension Ombudsman decisions that trustees are expected to consider all of them. Advice here will be crucial.
What to do?
It’s hugely important to get out in front of these issues as soon as possible, and certainly before the parties go to court.
If a trustee is looking to share part of their SSAS in the divorce settlement, an ex-spouse might decide only to consider this if the trustee permits you as adviser to inspect the files and do some due diligence on it.
This might also include speaking to the professional trustee or administrator as well (if there is one), as they would much rather highlight any practical issues early on than try and deal with an unenforceable court order.
If doubts still abound, there is always the option of applying the pension sharing order to other pension schemes if the trustee has any. And failing all else, the final option may be to involve the SSAS but only as part of an offsetting arrangement.
Whatever the outcome, expert advice here will be essential as there are plenty of pitfalls for the unwary.
Martin Jones, technical team leader at AJ Bell
This article was originally published on Retirement Planner on the 1st October 2019