5 reasons why building a DB SSAS makes sense for your clients?
Buck the trend: It’s not ALL about transferring DB pension schemes, some people need you to build them one.
I’m guessing every adviser has someone who needs a DB SSAS?
Here’s the scenario – do you recognise them?
Your client runs successful business, aged 50-55.
They have spent their life building the business and only recently have come into some real cash. They have £300,000 in the business, which they have left in the business after taking £12k PAYE and £80,000 dividends (they also have another £10k of taxable income: they are neither subject to MPAA or Tapered AA). They are also on for another bumper year of profits this year.
You have met these people recently?
They have done very little pension contributions in recent times and are now thinking about moving the business from rented premises to owner-occupied and taking more control as they build the business for the next 20 years: own business, own property/offices and expanding staff numbers. He has seen a nice office: £450k purchase price.
They NEED your help.
How much can you get into a pension wrapper, with full tax-relief and which will allow them to invest in their own office premises and pay rent to themselves?
I’m going to deal with one director, but this could apply to ALL directors as one investment.
This director we are dealing with has done very little pension planning. He has just never had the time nor inclination. He never understood it and before pension freedoms, never wanted to tie up his money. He AA is £40k for this year (2017/18) and he has another £80k CF from previous 3 years.
Total AA = £120k.
What can we do for this chap, his business and his future?
BTW – if you think this is ‘’tremendously dull’’, please stop here. No need to go on, the technical bit is coming up..
1. AA is £40kpa.
Yes. This is the money purchase value.
1/16 x 40 = £2.5pa income is the defined benefit (DB) value of the AA.
Valuing a DB accrual (for AA purposes) is based on HMRC valuation of x16 the pension accrued; it is what you can have as a DB pension accural without going over the annual allowance and creating a tax charge.
This is quite interesting (well, I think so anyway…stick with me…)
2. If you had some CF, let’s say, 40k, then you could fund a £5k pa pension in a DB pensions scheme:
1/16 x 80k (AA of 40k + CF 40k) = 5k DB pension accrual
Our client has £120k in total (80k CF and 40k AA), hence:
1/16 x £120k = £7.5k pension accrual allowed.
3. Now, here’s the clever bit (part 1)
How much would you expect a 54 year old to have as a CETV, based on an NRD of age 60, for a pension worth £7.5k?
Let’s say it’s got 66% spouses pension and full RPI index-linked inflation proofing.
You’ve probably seen some silly numbers, but I’m going to say you might have seen £300k?
Well, think of this in reverse: the cost of building this DB pension entitlement could be £300k (it’s all decided by an actuary, based on the individual client profile).
And the sponsoring employer can fund it: completely within the wholly-exclusive rules and wholly tax-relievable and within the AA limits for the client. He immediately has a pension pot worth £300k.
What has it cost to get the £300k out of the business?
Nothing. It’s fully tax-relievable.
4. The SSAS is a trust-based occupational scheme.
That means DB and DC occupational scheme and it’s investments are member-directed; they can invest in property. They can invest in commercial property.
Not only that, they can borrow to invest (up to 50% of the net asset value) and in this case a £300k initial cash pot could then be expanded to £450k immediately.
Our client now has £450k in a pension pot, all-tax-relievable, with no tax-charge. He can fund his office premises and he can recycle the rent back into this SSAS to pay for the borrowing, which is funding his pension.
Remember, this can be done jointly with the other directors as well.
5. Then finally, your client wants to retire? What then?
Well, then your client has a choice: take the pension (which could be funded via the rental by this stage) or what about taking a CETV?
You don’t have to take a DB pension at the point of retirement: you have a statutory right to a transfer…
How much does it ACTUALLY cost the sponsoring employer to fund this?
The tax-relief on this and the investment flexibility is frightening. It’s so scary, I bet that there are some of you thinking it’s too good to be true?
Well, for those on the journey to sitting the AF3 exam, I can assure you it is all true. This joins up our first two weeks of theory with a practical example of the application from week 1 and week 2 of the AF3 structured study plan.
Reverse engineer a DB transfer and rather than transfer out, transfer some money in for those recently wealthy and successful entrepreneurial clients of yours with cash in their business, who want to fund something substantially more than a 40k annual allowance…
…and join up the theory of AF3 with the application.
BTW – if you didn’t find this dull and want to find out more or need help presenting this to your clients – just drop me a line. All the best.