In this blog Andrew Troughton of Carver Knowles, Chartered Surveyors and Land Agents in Worcestershire explains all:
Disclaimer 1 – This article is not about Pension Auto Enrollment, but looks at how farmers can use SSAS Pensions (Small Self-Administered pension Schemes) to take control of, and better use their pensions.
Disclaimer 2 – We are Land Agents and Rural Chartered Surveyors not Financial Advisers or Pension Providers. We do however believe SSAS pensions are an excellent choice for some farmers, therefore we have tried to set out the key benefits and pitfalls of SSAS pensions in a simple way.
This article will give a Land Agents view on SSAS pensions. Hopefully providing enough detail to encourage you to investigate this type of pension further if you feel it may work for you.
So what is a Small Self-Administered Scheme (SSAS)?
It is basically a private pension that an individual or small group of individuals set up. They then put other pension pots, cash or farm assets into it. Property assets are then rented back to the farm or rented to another business. As farm pensions go, we believe these are as farmer friendly as they get.
The main benefits of a SSAS pension to farmers and landowners are:
- The SSAS pension is run by a pension provider, but how the funds are invested is mainly determined by the individual giving a lot of control back to the person who is investing the money.
- The SSAS can take in existing pension funds, so these funds are then under the control of the new pension.
- It is then possible to borrow an equal amount (i.e. up to 50% of the scheme’s value) to buy a property asset, such as farmland, so effectively doubling the buying power.
- Property assets that are already owned can be transferred into the pension.
- Once the asset is in the pension, a rent is paid by the farm business to the pension and this rental income is not subject to income tax.
- The pension pot can build up to £1m per person and husband and wife could have a joint pension or include children to increase the pot to a considerable sum.
- At 55 years old a 25% lump sum can be taken out tax free.
- On death of one of the SSAS pension beneficiaries, the pension is transferred to the surviving spouse or child so it is not lost.
So what are the disadvantages of a SSAS pension?
- Fundamentally you don’t own the asset, your pension does. You remain the beneficiary and with the SSAS provider are in control of the assets, but the pension is its own legal entity.
- As might be expected because it’s a bespoke pension the set up costs are higher. These will typically include:
- Setting up charge from your SSAS provider. (Budget around £1000)
- Legal costs to transfer the property. Budget around £750.
- Cost of a valuation to assess the freehold value and commercial rent. (Budget around £1000)
- There will also be ongoing running costs. These may be around £1000 per year, but will vary depending on the work involved.
- The pension expects a commercial rent to be paid. As rural valuers, we can assess the pension assets. In discussion with the provider and farmer beneficiary, we arrive at commercial terms for a lease and a commercial Market Rent. This is a relatively straight forward Red Book valuation but includes any special requirements of the pension company. Although we do this formally when the pension is established, we are happy to undertake an informal valuation at the start of the process.
- There is a slight concern that the Government will change pension rules for the worse. Having said this all the recent changes have been to encourage SSAS pensions.
What rural property can go into a SSAS pension?
There are many variations, but the general items include:
- Farmland (and small bits of incidental woodland)
- Farm buildings
- Renewable projects
- Commercial woodland.
In all cases a commercial rent should be paid by a business (either the farm if the assets is still occupied by the farm or a third party if the assets is let out).
What items can’t be put into a SSAS pension?
- The farmhouse
- Any other residential property
- Other investment assets – wine/antiques/artwork
Where do I start with a SSAS pension?
Because of the £1m limit, it’s important to consider the property values, likely growth and rental income at an early stage. This can be assessed informally and the assets can be part of a larger property. The potential Market Rent is also a consideration as this actually has to be paid. The issue of how this affects the viability of the existing farm business should therefore be considered.
Your key long term partner is the SSAP provider. They help you run and administer the SSAS and ensures compliance with HMRC regulations. There are relatively few providers and care should be taken to find one who understands the nature of farming and rural assets. You should also ask how they set up and manage the pension and their costs for these services.should be considered.
For further information regarding SSAS pensions please see the following: http://www.pensionsadvisoryservice.org.uk/
Or of course please give us a call on 01684 853400 and we will be very happy to help with any queries you have.