Pensions for Senior Managers

2. The Options

Under the reform set out in the Pensions Bill 2007, all employers have to contribute to a company pension scheme unless workers opt out. The new system of Personal Accounts, set for introduction in 2012, will set minimum employer contributions at three per cent, employees at four per cent, while one per cent comes from tax relief. Total annual contributions are capped at £3,500 meaning businesses should look outside Personal Accounts to provide benefits for their employees.

2.1 The most common forms of an occupational pension plan are defined benefit (DB) and defined contribution (DC) schemes, but there are a number of supplementary and alternative schemes available.

2.2 Additional voluntary contributions (AVCs) are DC schemes that allow members to top-up their main pension plan.

• There are two types of AVC: an in-house AVC run by the employer; and free-standing AVCs which are run by an external provider.
• Annual payments to AVCs are limited to £255,000 or 100 per cent of salary, whichever is lower.
• AVC schemes offer the members tax relief.

2.3 Personal pensions can also be used to top-up occupational plans although they can also form the main retirement plan.

• Stakeholder personal pensions must be made available by any company employing more than five staff. These are usually cheap to set up and run.
• Employer contributions are deductible against corporation tax.
• Group Personal Pensions (GPPs) combine individual personal pensions into one plan, allowing for cost efficiency. They operate under the same rules as individual personal pensions.
• Personal pensions are DC plans which means the individual rather than the employer bears the investment risk.
• Minimum retirement age for personal pensions rose from 50 to 55 in 2010.

2.4 Executive Pensions Plans (EPPs) are defined contribution plans provided by the employer and run by a life assurance company.

• Employer contributions are deductible against corporation tax.
• Employees are not liable to income tax or National Insurance contributions (NICs) on payments made to an EPP.
• Contributions are subject to tax relief limitations.
• Members can transfer existing plans into their EPP.
• The frequency and amounts payable to an EPP are usually flexible.

2.5 Self-invested Personal Pensions (SIPPs) are similar to standard personal pensions but allow greater investment freedom.

• SIPPs are governed by the same tax, contribution and eligibility rules as personal pensions.
• SIPP investors can control their investment strategy and hire a fund manager or broker to carry out investment decisions.
• SIPPs are run under trust law although the member can be the trustee if the plan is overseen by an independent administrator.
• Administration costs can be high.

2.6 Small Self-administered Schemes (SSASs) are occupational plans usually made up of directors and senior managers.

• Set up under trust deed, SSASs encourage greater control over investments and assets.
• SSASs can be expensive to set up with adviser, trustee and management fees.
• Employer contributions are deductible against corporation tax.
• A SSAS can lend money to the employer provided the loan does not exceed 50 per cent of the net value of the scheme's assets.

2.7 Pensions salary sacrifice allows employees to exchange earnings for non-cash benefits which means both employer and employee make National Insurance (NI) savings.

• Employee pension contributions are converted into employer contributions which do not incur NI.
• The employer can pass NI savings to employees as a bonus contribution to the plan.
• Pensions salary sacrifice can see contributions rise by 30 per cent at no extra cost to the employer.

2.8 Funded Unapproved Retirement Benefit Schemes (FURBS)/Employer-Financed Retirement Benefits Scheme (EFRBS) were set up to provide benefits for employees earning more than the salary cap.

• The tax reforms in 2006 have replaced maximum salary with a lifetime allowance making FURBS/EFRBS less relevant.
• Contributions do not attract tax relief but for funds accumulated prior to 6 April 2006, the entire sum can be taken tax free.