SIPP vs SSAS: investment, property and borrowing rules

SIPP vs SSAS: what is the difference?

A self-invested personal pension (SIPP) is a personal pension offered by an insurance company or specialist operator. The provider normally acts as trustee and scheme administrator,and the individual decides how their pension savings are invested from the range of assets permitted by the scheme, which may include shares, funds, commercial property and other authorised investments.

A small self-administered scheme (SSAS) is an occupational pension scheme established by an employer. Members are commonly trustees and are directly involved in investment and governance decisions. SSASs are typically established for a small number of members and, where the scheme has no more than 11 members and satisfies the relevant legislative requirements, it may qualify for certain easements available to smaller occupational pension schemes.

What can a SIPP or SSAS invest in?

Registered pension schemes are not limited to a single statutory list of permitted investments. However, certain assets and transactions create tax charges, and the scheme rules or the provider may disallow investments that tax legislation does allow.

Common investments may include cash, deposits, quoted securities, collective investments, government and corporate bonds, commercial property and land. Specialist or unquoted investments require particular care over valuation, liquidity, due diligence, conflicts and connected parties.

Commercial property

A SIPP or SSAS can generally acquire commercial property, subject to the scheme’s rules and the provider or trustees accepting the investment. Typical examples include offices, shops, warehouses, industrial units and development land. Hotels, care homes, student accommodation and buildings with living accommodation require careful analysis because the facts may bring all or part of the property within the residential-property rules.

• Any acquisition or disposal involving a member, ex-member, sponsoring employer, ex-sponsoring employer, connected person or ex-connected person must be at market value.
• Where a member or sponsoring employer occupies scheme-owned commercial property, a commercial rent should be charged and paid under properly documented terms.
• The trustees should consider concentration risk, liquidity, valuation, insurance, maintenance costs, void periods and the cash needed to pay benefits.
• VAT and Stamp Duty Land Tax may apply, even though investment income and gains held for the purposes of a registered pension scheme are generally tax advantaged.

Residential property and taxable property

Direct or indirect investment in residential property by a SIPP or SSAS can create significant unauthorised-payment and scheme-sanction charges.

Residential property broadly means any property that is used, or suitable for use, as a dwelling. The definition extends to associated land, gardens and grounds, as well as buildings situated on that land. In certain circumstances, rights to occupy holiday accommodation, such as timeshare arrangements, may also be treated as residential property.

The legislation excludes certain types of accommodation from the definition. These include children's homes, purpose-built student halls of residence, care homes and other institutions providing residential care, hospitals, hospices, prisons and similar establishments.

Tangible moveable property, such as art, antiques, fine wine, jewellery, boats and classic cars, is also taxable property.

HMRC Pensions Tax Manual - PTM125200:Investments: taxable property 

Borrowing by a SIPP or SSAS

A registered pension scheme may borrow for any purpose if the borrowing benefits the scheme and is permitted by the scheme rules and any wider legal requirements. Borrowing is often used to help buy commercial property, but it is not restricted to property purchases.

Money can be borrowed from any source. But, if the scheme borrows money from any member or sponsoring employer or a person/company connected to the member or sponsoring employer this must be done at a commercial rate otherwise it will be subject to a tax charge.

The aggregate authorised borrowing limit is generally 50% of the relevant net fund value immediately before the new borrowing. Existing outstanding borrowing must be included. The asset to be bought with the new borrowing is not included in the pre-borrowing valuation.

Borrowing example

A money purchase arrangement has assets of £400,000 and existing borrowing of £40,000. Its net value for the borrowing calculation is £360,000. The overall authorised borrowing ceiling is £180,000, so the maximum additional borrowing is £140,000.

HMRC Pensions Tax Manual - PTM12400: Investments: borrowing

Loans made by the scheme

Loans to third parties

A registered pension scheme may make a genuine commercial loan to an unconnected third party, subject to the scheme rules and the trustees’ or provider’s investment requirements. The terms must be consistent with acting for the benefit of the scheme. Appropriate security, credit assessment, interest, documentation and repayment terms should be considered.

SSAS loans to a sponsoring employer

Because a SSAS is an occupational pension scheme, it can potentially lend to a sponsoring employer. To be an authorised employer loan, the statutory conditions must all be met.

A loan may be rolled over once for up to a further five years where the employer has genuine financial difficulties and the statutory conditions are met. Any restructuring should be reviewed carefully before the original term expires.

Loans to members and connected parties

A loan to a member, former member or a person or company connected with a member (or previously connected with them)  is treated as an unauthorised payment. The whole loan amount can be within the charge, regardless of whether interest is charged or the borrower intends to repay it.

HMRC Pensions Tax Manual - PTM123000:Investments: loans

HMRC Pensions Tax Manual - PTM123200:Investments: loans: loans to sponsoring employers

Security requirements

If an occupational pension scheme lends money to a sponsoring employer: 

• The loan must be secured for the entire term with a first legal charge on an asset owned by the employer or another person.
• When the loan is made, the security must be worth at least the full amount of the loan plus interest.
• No other lender can have a higher claim on that asset than the pension scheme.
• If the security asset is replaced, the new asset must be worth at least the lower of:
  • the market value of the old asset, or
  • the outstanding loan amount (including interest). 

What interest must be charged?

All loans made by registered pension schemes to sponsoring employers is calculated using the average of the base lending rates of the following 6 banks plus 1%, rounded up to the nearest multiple of ¼%:

• The Bank of Scotland plc
• Barclays Bank plc
• HSBC plc
• Lloyds Bank plc
• National Westminster Bank plc
• The Royal Bank of Scotland plc

Shares and employer-related investments

A registered pension scheme can generally invest in quoted or unquoted shares. For an occupational scheme, payments for shares in a sponsoring employer are within the authorised employer-payment rules only if the statutory limits are satisfied.

• The market value of shares in any one sponsoring employer must be less than 5% of the scheme’s relevant fund value when acquired.
• Where there is more than one sponsoring employer, the combined holding must be less than 20%, with the less-than 5% limit still applying to each employer.
• The test is applied when the shares are acquired. A later movement in values does not normally trigger a retest unless further shares are acquired.
• There is no separate limit on the percentage of a company’s issued share capital that a scheme may own, provided the value-based limits and all other rules are met.
• A SIPP has no sponsoring employer, so these specific employer-related percentage limits do not apply. That does not make every investment in a member-controlled company acceptable. The taxable-property, indirect-holding, connected-party, value-shifting and arm’s-length rules must still be considered, and many SIPP providers will not permit the investment.

Connected-party transactions

Where a scheme buys, sells, leases or otherwise deals with a member, former member, sponsoring employer, former sponsoring employer or connected person, the terms must be those that independent parties would reasonably agree at arm’s length. An independent valuation should normally support material property and unquoted investment transactions.

A connected person can include certain relatives, spouses or civil partners, trustees, companies under common control and other persons defined by the tax legislation. The definition is technical, so it should be checked against the particular facts rather than assumed.

HMRC Pension scheme tax manual - PTM027000 - General principles: connected persons

What happens if the rules are broken?

The tax result depends on the transaction. A member or employer unauthorised payment is generally subject to a 40% unauthorised-payments charge. In addition to this, if the amount of the unauthorised payment exceeds 25% of the fund value there will also be a surcharge of 15% bringing the total tax charge to 55%.

For borrowing above the authorised 50% limit, the excess can be a scheme-chargeable payment subject to a scheme-sanction charge. Taxable-property cases have their own detailed rules and may produce charges on acquisition, use, income and disposal. Scheme deregistration is a separate and exceptional consequence, not the automatic result of every prohibited investment.