Personal Pension Plans
Personal pension plans are effectively investment policies that are designed to provide an income in retirement.
Personal pension plans operate on a defined contribution (money purchase) basis. This means that the pension that is ultimately payable depends on the amount that has been paid into the scheme and on the performance of the associated investments.
Small Self-Administered Schemes (SSAS)
Small self-administered schemes are popular with company directors. An “SSAS” is a company scheme where the members are usually company directors or key employees. They are attractive to small companies because they provide flexibility and control over the scheme assets. The scheme is established by a trust deed.
The trustees can invest in a wide variety of assets, including commercial property. This offers the possibility of buying the business premises through the scheme and renting it to the company, which is something of a ‘win-win’ situation.
The scheme can also make loans to the sponsoring company as long as certain conditions are met.
Self-Invested Personal Pension plans (SIPPs)
Like the SSAS, SIPPs are self-administered schemes, but are for individuals rather than for companies. They offer the same advantages as regards flexibility and control over scheme assets and the ability to invest in a wide range of investments, including commercial property. Consequently, they too can be used as a vehicle to purchase the business premises.
Stakeholder pensions
Stakeholder pensions are a type of low cost personal pension scheme aimed at non-earners and low-earners. A company director may use a stakeholder pension to make contributions on behalf of a non-working spouse or minor children. This can be tax efficient as the contributions are made net of basic rate tax even if they are made on behalf of a non-taxpayer. This means that a gross contribution of £3,600 will only cost £2,880.
Occupational schemes
Occupational schemes can be on a defined contribution (money purchase) or a defined benefit (final salary) scheme. Registered schemes offer tax advantages.
Tax advantages
Saving for retirement by contributing to a registered pension scheme can be particularly tax efficient. Individuals can make contributions to any number of registered pension schemes as long as their total pension contributions for the year do not exceed the higher of the basic amount (currently £3,600), their earnings for the year and the available annual allowance.
Although the annual allowance was reduced significantly from £255,000 to £50,000 from 6 April 2011, it is still possible for high earners to make significant tax-relieved contributions. The annual allowance is currently £50,000, and unused allowances can be carried forward for up to three years.
Employers can also make contributions to a registered scheme on behalf of employees as long as the total employee and employer contributions do not exceed the annual allowance. The contributions are also tax deductible in the hands of the company.
Total pension savings are subject to the lifetime allowance cap, currently £1.8 million.
Tax relief is not available for contributions to an unregistered scheme.
Contracting-out
A person can choose to opt out of the second state pension and instead top up the state pension by means of private pension provision. Contracting-out for defined contribution schemes is to come to an end from April 2012.
Practical Tip
Pension savings can be particularly tax efficient for both the director and the company.
Sarah Bradford
