Forbes Solicitors
July 2019  SIPP/SSAS eNews

Fail to prepare, prepare... for delays

 

The pitfalls of retrospectively amending the terms of Pension Schemes

 

SIPP & SSAS Investments


Fail to prepare, prepare... for delays

When deciding to buy a commercial property through a pension scheme arrangement, it is important to bear in mind that there are additional issues and complexities involved through the course of the transaction. Some of the key issues relevant to pension scheme purchases which should be considered at the outset are as follows:

How will the purchase be funded?

As with any property purchase, there are additional costs to consider including fees for professional services such as a valuer and asbestos surveyor, the scheme administrator’s fees, legal costs and SDLT that may be payable. 

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The pitfalls of retrospectively amending the terms of Pension Schemes

In the recent case of BIC U.K. Limited v Burgess [2019] EWCA Civ 806 (“BIC”), the Court of Appeal offered further clarity on the ability to retrospectively amend pension scheme rules. The Court of Appeal overturned the previous High Court decision finding that increases to pensions in payment in this instance had not been validly introduced.

Under many pension schemes, the rules expressly allow for retrospective amendment. However, in the absence of an express power, it is necessary to demonstrate the existence of an implied power if retrospective amendments are to be permitted.

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SIPP & SSAS Investments

Many people are initially attracted to the concept of a bespoke pension scheme such as a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) because of the scheme’s ability to acquire commercial property as an investment. 

Some pension schemes invest in more than one commercial property, but some clients are reluctant to tie too much of the pension fund up in property as it can be perceived as being illiquid.  For example, they may have one eye on retirement and be looking at withdrawing the maximum Pension Commencement Lump Sum (PCLS), which may not be possible if the bulk of the pension scheme’s assets are tied up in property. 

Whilst some commercial properties can have a good rental income stream, this type of investment can be expensive to acquire in terms of the pension provider’s fees and other costs such as surveys and legal costs. On an ongoing basis, the pension scheme will be liable for ongoing costs such as maintenance, insurance and leases.  The trustees and members also need to consider how a void period (where the property has no tenant) would affect the value of the pension fund and therefore the retirement plans of the scheme’s members. It is not unknown for such void periods to last for several years and the property may not then be attractive to potential buyers for several reasons. 

So, if the trustees of a SSAS or the member of a SIPP decides not to acquire any more commercial property, what other investment options do they have?

One of the main differences between a SIPP and a SSAS is that in certain circumstances, a SSAS can make a “loan back” to the sponsoring employer, which can be used to assist the business. The trustees would be unwise to loan back to a business which is unlikely to repay the debt which would cause the fund shares of the scheme members to be affected. These loans need to be secured on external assets and for loans to be on a capital and interest basis.

Every SIPP or SSAS needs an associated bank account for transactions such as the payment of pensions and the receipt of ongoing rent etc (where a commercial property is owned by the scheme) but interest rates are at historically low levels.

Very often a SIPP or SSAS has a very long lifespan and at Chancellor Financial Management we have some SSAS cases that have been in existence for over 30 years.  In these cases, the trustees have often taken a medium to long term investment outlook and have invested in a portfolio of assets such as stocks, shares, fixed interest investments and commercial property.

A risk profiling exercise should take place before any investment recommendation is made. A qualified financial adviser will be able to assist with the risk profiling exercise and to recommend a suitable investment strategy. 

In recent times, investment “platforms” have become more popular than “Trustee Investment Plans” which were offered by Insurance Companies. Platforms can hold a range of qualifying investments to suit the trustees such as unit trusts, open ended investment companies, investments trusts, etc.  The available investments can include passive investment strategies such as tracker funds and Exchange Traded Funds where the costs are much lower than traditional active funds.  Access to platforms can be from a low threshold (typically £25,000 and above).

Where higher amounts are available to invest, typically £250,000 or more, then the trustees of a SSAS – or a SIPP member - who have more complex requirements, may choose to invest via a more bespoke strategy such as a portfolio managed via a Discretionary Fund Manager. 

Discretionary Fund Managers can construct a truly bespoke portfolio for SSAS and SIPPs and manage this on an ongoing basis.  Here at Chancellor Financial Management we have relationships with several DFMs who have the same core fee and therefore there is no advantage or disadvantage to us in choosing any one DFM (other than them being able to meet the trustees’ and members’ specific requirements).  Unlike with collective investment schemes, where it is easier to monitor performance, Chancellor utilise a sophisticated independent monitoring service for DFM portfolios which primarily analyses the performance achieved against the agreed benchmark. 

There is no one investment solution for pension schemes of this type. Advice should be sought as to the most suitable investment approach for the trustees and scheme members which matches their attitude to investment risk and capacity for loss. 

David Heaton is a Chartered Financial Planner with Bolton based independent Financial Advisers Chancellor Financial Management Ltd and can be contacted on 01204 526846. 

 

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