Changes are on the way for holders of small self-administered pensions. Popular with business owners, landlords, entrepreneurs, IT contractors and medical consultants, “SSAPs” have been a flexible, tax-efficient way to save for retirement. New rules, however, will mean hefty annual charges from next April.
The big upside of SSAPs was that, unlike an occupational pension scheme, you were less limited in where you could invest your money. Investments in property, loan notes, crypto, stocks and commodities were all possible. Some people have leveraged this kind of pension to buy a rental property with a mortgage.
Take a coffee shop owner who amasses €100,000 plus in their business from trade. Rather than taking that as salary, where €52,000 will go to Revenue in tax and social insurance, they pay themselves a small salary to live on and put the €100,000 into a pension trust.
No benefit-in-kind is charged on that money, so the full €100,000 goes straight into the pension trust with no deduction of tax. That means they now have twice the amount of cash available to buy a rental property, for example, than if they had paid themselves that sum as salary.
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Using the pension trust, the coffee shop owner could buy an apartment for €100,000. And if this yielded €10,000 net in rent, there was no income tax to pay on this.
If, however, they had taken the full €100,000 in salary, they would just have €50,000 to buy the property, and they’d have to pay half of the €10,000 rent in tax every year.
If the value of the property went up by €50,000 and they sold it in the pension trust, there would be no capital gains tax, so the full €150,000 comes back in as cash with which they could buy another property or invest otherwise.
SSAPs are self-administered but an independent, Revenue-approved trustee must be appointed to ensure the scheme meets regulatory requirements.
And, from April of next year, the burden of that regulation increases. The transposition into Irish law of the EU Institutions for Occupational Retirement Provision (IORP) II directive means significant new obligations on pension scheme sponsors and trustees.
The directive has transformed how occupational pension schemes are governed and supervised. Transposed into Irish law in 2021, it introduced far-reaching new requirements for trustees and sponsors, covering governance, risk management, transparency and sustainability.
Designed to better protect members and ensure long-term stability, IORP II has prompted consolidation in the State’s pensions landscape, with many smaller schemes migrating into larger, professionally managed master trusts to meet the directive’s enhanced standards.
The knock-on effect for SSAP pension-holders is a significant bill for fees.
Annual charges upwards of €37,000 are coming from April next year for those who remain in SSAPs, says Ralph Benson, head of financial advice at online advisers Moneycube.ie.
“In the case of a large company pension scheme, these kinds of costs are okay, and expected. If you’re a one-person scheme, where typically the owner controls and pays a lot of attention to their pension pot, arguably these external checks are overkill,” he says.
The way Ireland has transposed the EU rules is akin to using a sledgehammer to crack a nut, says Benson.
“The EU is increasing regulation of pensions generally, but Ireland has chosen to apply these rules even to pension schemes with a single member.”
The overall thrust is towards more State control and scrutiny over what you can invest your money in within a pension, he says. “These nosebleed fees will destroy value in your [SSAP] pension. They are being made effectively prohibitive,” says Benson.
SSAP holders will need to take action to avoid the charges, and fast.
There are alternatives – personal retirement savings accounts (PRSAs) are the main route for those seeking to move on, says Benson. However transferring your pension to one can take a long time, particularly where a scheme holds property assets, multiple investments or mortgage debt, he says.
Some providers have already increased SSAP fees to encourage customers to move on, says Benson.
“If these changes affect your pension, don’t wait until there’s a rush to exit. Now’s the time to look at your options, to move your self-administered pension into a sensible structure,” he says.
Those who don’t move in time will be “eaten alive in costs”, says Benson.
While PRSAs are a good alternative, SSAP holders, forced by the new costs to change the structure of their pension, will lose some benefits of their current arrangements.
It’s harder to fund a PRSA generously as the contribution is capped at annual pay, says Benson, whereas occupational pensions allow for the fact that many self-employed people don’t pay themselves much in the early years, and pensions enable them to catch up, he says.
“I’ve a customer who took no pay for three years while building his business. Once it got off the ground, he was able to pay himself and his pension generously; that’s now more difficult.”
The changes will provide SSAP-holders with an opportunity to review their overall investment strategy, he says.
“Many SSAPs are heavily weighted towards property and cash, with rental income often sitting in low-yield bank accounts. This creates poor diversification and exposes members to unnecessary risks,” says Benson.
“As cash continues to generate near-zero returns in Irish banks, pension-holders need to look at other asset classes which can deliver real growth, while ensuring their pensions are protected from these prohibitive new fees.”
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
