Executive Pensions

3. Company Pension Schemes

A company scheme will provide you with a basic pension. If you are a high earner, you may want to supplement it to maintain your standard of living (see Company pension schemes).

3.1 Company schemes now operate under a much more relaxed set of rules.

• You receive tax relief at your highest rate. Your total personal contributions are limited to 100 per cent (previously 15 per cent) of your gross earnings below the 'annual allowance' of £235,000.
• The company can set its contributions off against its tax bill.
• Pension contributions on behalf of directors of quoted companies and other long-term incentives must be disclosed in the annual report and accounts.
• There is now no legal maximum on the pension you can receive from a final salary scheme, although it will be limited by the rules of the scheme. The tax-free lump sum you can take on retirement, in exchange for part of your pension, is up to 25 per cent of your total pension funds.
• Insofar as your pension funds exceed the 'lifetime allowance' (£1.65 million in 2008/09), benefits you take in the form of income will be taxed at 25 per cent, and benefits that you take as lump sum will be taxed at 55 per cent.
• Final salary (for controlling directors and high earners) is usually defined as the average total earnings over the last three years.

3.2 You can top up a company scheme with the benefit of tax relief provided that do not exceed the annual allowance and stick to HM Revenue & Customs-approved schemes.

• You can use your own company's additional voluntary contributions (AVC) scheme, or AVCs from another pension provider (free-standing AVCs, or 'FSAVCs'). If you choose an FSAVC you will have to pay charges, but the investment performance might be better. FSAVCs are not available for controlling directors.

3.3 Your company can set up an executive plan for further benefits (see 4.1).

3.4 You can contribute up to personal or stakeholder pension schemes. See Stakeholder pensions.

3.5 You could also top up a company scheme through an unapproved top-up scheme.

• There are no restrictions on contributions.
• You will not get tax relief on your own contributions and will be taxed at your highest rate on contributions made by your company.
• The company can offset its contributions against corporation tax.
• Insofar as the total pension funds you have accumulated exceed the 'lifetime allowance' (£1.65 million for 2008/09), they will be taxed when they are paid as benefits: at 25 per cent if they are paid as income, and at 55 per cent if they are paid as lump sums.
• Some schemes are 'unfunded'. The company pays the pension out of its resources when you retire, but sets aside no funds in advance. If the company becomes unable to pay, you are unlikely to receive the top-up. You will be taxed on sums paid from an unfunded scheme when you retire.