Executive Pensions

4. Approved Alternatives

There are alternatives to company pension schemes. The four types of pensions outlined below all qualify for tax relief.

4.1 Executive pension plans (EPPs) have been widely used for directors and other high earners.

• The maximum annual pension under scheme rules has been limited to two thirds of final salary, though this may now change. It may be restricted by the £235,000 'annual allowance'.
• The retirement age can be set from age 60 if scheme rules allow (as compared with 65 for most company schemes). Benefits can usually be taken at any time between 50 and 75, provided you have retired. The minimum pension age is to rise to 55 by 2010.
• The maximum tax-free lump sum you can take on retirement, in exchange for part of your pension, will be 25 per cent of the pension fund, provided it does not exceed the 'lifetime allowance'.
• The business usually pays all the contributions, although personal contributions are allowed.

4.2 Small self-administered pension schemes (SSASs) are suitable for directors who wish to use the pension fund to help finance the company.

Typically, SSASs are used where the members all own shares in the company. A scheme must normally have fewer than 12 members.

• Up to 50 per cent of the scheme's fund (25 per cent in the first two years) can be loaned to the company. The fund must be calculated excluding any amounts earmarked for payment to members (or their spouses) who have already retired. The loan must be repaid at a prescribed commercial rate of interest. Interest can be deducted from taxable profits.
• The fund can be used to buy a commercial property for occupation by the company. This includes buying a property from the company and leasing it back.
• The scheme can borrow to make investments. Borrowing is limited to 45 per cent of the value of the fund, plus three times annual contributions.
• The maximum annual pension was limited to 2/3 of final salary, although this may now change. It may be restricted by the £1.6 million 'lifetime allowance'.
• The maximum tax-free lump sum you can take on retirement, in exchange for part of your pension, will be 25 per cent of the value of your pension funds, provided that they do not exceed the 'lifetime allowance'.
• Within the above parameters, the members of the scheme can decide how the pension fund is divided up. For example, a retiring director who wishes to sell or pass on shares could exchange them in return for a larger proportion of the pension fund.
• SSAS schemes are more expensive to set up than other schemes. The company must employ a professional pensioneer trustee. Charges include actuarial and management fees. (It may be possible to delay charges by setting up a deferred SSAS.)
• To make the SSAS financially viable, the company should be prepared to put in at least £50,000.

4.3 Personal pension schemes (including stakeholder pensions) offer advantages for senior managers who change jobs frequently (see Personal pension schemes) and directors who receive much of their pay in dividends. Principal features of personal pensions are:

• You receive tax relief at your highest rate. Tax-favoured contributions are limited to 100 per cent of your gross annual earnings, provided they do not exceed £235,000 (for 2008/09).
• The company can set off its contributions against its corporation tax.
• These limits include contributions made by the company.
• There are no restrictions on the size of the pension that can be taken.
• The maximum tax-free lump sum you can take on retirement is 25 per cent of the fund.
• You can at present take your pension from age 50 (this will rise to 55 by 2010).
• There are no guarantees as to the size of pension you receive. What you get back is related to how much you put in, how the investments perform, what the charges are and annuity rates when you retire. With stakeholder pensions there are limits on the level of charges. (See Stakeholder pensions).

4.4 For those who wish to control their own pension investments, self-invested pension plans (SIPPs) are a variation on personal pension schemes.

• Tax relief and restrictions are the same as for personal pensions.
• You decide how the fund is invested within limits set by HM Revenue & Customs.
• Administration is delegated to a plan provider, but costs can be relatively high.
• SIPPS can be used to purchase commercial property.