Pensions
If you are running a successful business, how can you use that to generate financial security in retirement? We have a range of potential solutions that will provide both you, and your employees, with tax efficient retirement benefits.
Some of the areas we can discuss with you are:
- Stakeholder arrangements
- Executive Pensions
- Small Self-Administered Schemes (SSASs)
- Salary Sacrifice Pension
- Alternatively Secured Pension (ASP)
- Occupational Pensions
- Employee Pension Schemes
- Self Invested Pension Schemes (SIPPs)
Your Gemini Adviser will take the time to understand your needs and recommend a solution that will enable you and your emplyees to benefit from the success of your business.
Stakeholder Pension, Executive Pension & Small Self Administered Schemes
Stakeholder Pension
Stakeholder pensions were introduced in 2001 and are designed as low cost, simple pensions aimed at encouraging more people to save towards their own retirement.
Generally provided by insurance companies, Stakeholder pensions must conform to certain criteria. These are:
- Charges are 'capped' at no more than 1.5% per annum for the first ten years and 1 per cent thereafter.*
- Minimum contributions must be no higher than £20 and you must be given the flexibility to pay as and when you choose.
- You must be given the right to transfer the pension to another provider without penalty
- There must be a 'default' fund into which contributions are invested for anyone who does not want to make their own fund selection. Moreover, this so-called 'lifestyle fund' must become more conservative as you get older, so that as retirement approaches your money is in safer investments.
- Stakeholder pension schemes must be run in the interest of their members, and will either have trustees or they will be run by a scheme manager.(*The annual charge for anyone who purchased their stakeholder pension scheme before 6 April 2005 is 1% and will remain at that level for as long as they remain in the scheme. However, if they switch to another plan this new charging structure will apply).
- If you are employed then your firm may offer a Stakeholder scheme that you can take advantage of, where the charges may be even lower and your employer may boost your own contributions by paying into the scheme on your behalf.
Executive Pension (EPP's)
This is another type of scheme that has little relevance since 'A Day'. EPPs are also for employees. They were attractive to high income earners because contribution levels were more generous than other types of pension, enabling them to build up a large pension in a relatively short space of time.
Now that all pension schemes are treated the same, and there is an overall contributions limit that applies across the board, there is usually no reason to have an EPP, but care should be taken if you are transferring this to another scheme as tax free cash entitlement can in some cases be protected is it is currently more than 25%. You may also have extra responsibilities if you are the scheme administrator.
Pre A-Day (April 2006), one of the main reasons for taking out an EPP was the fact that members could make higher contributions than they usually could to a personal pension. Now that the same rules apply to all registered pension schemes, this is no longer the case.
Tax free lump sum
Under the old occupational pension scheme regime EPPs could potentially provide a tax free lump sum greater than was allowable under a personal pension.
The post A-Day regime means that there is just one set of rules enabling a tax free lump sum of up to 25% of the fund, although transitional rules apply to existing EPPs.
Tax relief
EPPs allow higher rate tax relief at source for scheme members through the net pay arrangement. This is a valuable benefit for higher rate taxpayers making personal contributions, although many EPPs are funded solely by employer contributions.
Pensions Act requirements
The Pensions Act 1995 set out specific requirements for occupational pension schemes, such as The Executive Pension, with fines and sanctions for non-compliance. These include provision for Member Nominated Trustees, provision for dispute resolution, a statement of investment principles and the requirement to appoint independent advisers.
The Pensions Act 2004 also introduced the additional requirement for the Trustees of occupational pension schemes to have greater knowledge and understanding, with sanctions if the requirement was not met. EPP schemes are subject to these requirements, but there are some exemptions, often depending on the size of the scheme and the assets held. These Pensions Act requirements do not apply to personal pension schemes.
Small self-administered schemes (SSASs)
SSASs are technically money purchase occupational pension schemes, generally used by family firms. They are complex arrangements, and to qualify there must be fewer than 12 members currently building up pension benefits, at least one of whom must be a controlling director, or have been in the last 10 years.
Since the changes to pension legislation introduced on 6 April 2006 ('A Day') many of the special features of SSASs have been removed.
As a trust based scheme the SSAS will need trustees, or a corporate body acting as trustee, plus an Administrator, and an Actuary. The structure can vary to suit the individual needs of the company/directors who wished to have the SSAS set up. Alternatively it can be an off the peg arrangement.
The scheme administrator carries out the day to day running of the SSAS and the actuary is required to complete actuarial valuations at least once every three years.
SSASs now rank for the normal limits on employer related investments. This means that a SSAS cannot invest more than 5% of the fund value in the shares of the sponsoring employer. There are now no limits on concentration of investments for registered pension schemes, such as SSASs. This means that a SSAS, like any other registered pension scheme, could hold 100% of the issued share capital of another company, provided it was not those of the sponsoring employer.
The trustees of a SSAS can purchase up to 30% of the shares in an unlisted company. They are not permitted to purchase shares from the members or persons associated with them.
The above limits do not apply to a scheme that is not an occupational pension scheme (such as a SIPP).
Salary Sacrifice Pension
What is salary sacrifice?
This is an increasingly popular device to reduce the cost of pensions. Essentially, it involves employees' salaries being reduced by the amount of their pension contributions and those contributions instead being paid directly by the employer.
With the cost of pensions rising this device can make a small but very significant contribution to the affordability of pensions.
The reason for doing it is that the lower level of pay means National Insurance contributions are reduced both for employers and employees.
When the concept first emerged it was thought that it was a tax loophole, which the Government would soon move to close. But there is no sign of this happening. This angle ignores the fact that there quite a few pension schemes that have always been non-contributory for employees and that, insofar as salaries may have been lower because of that, their members could be regarded as already in the position which salary sacrifice takes you to.
There are some particular pitfalls with salary sacrifice which mean that it is not suitable for everyone.
As mentioned, the key benefit of salary sacrifice as part of your flexible benefits offer is that the NICs relating to the sacrificed amount can be saved, allowing you to administer the benefit out of the savings.
An example of how salary sacrifice benefits can be advantageous to your business is shown in the following table, which details the savings you can make with a salary sacrifice pension:
Number of employees in the scheme |
100 |
Average salary of employees |
£30,000 |
Employee contributions |
5% of salery |
Savings in NI at 12.8% |
£19,200 per year |
Alternatively Secured Pension (ASP)
ASPs have only been available since 6 April 2006. Prior to then, everyone had to use their pension savings to buy an annuity by age 75. This is still the rule but there is now an alternative option, ASPs.
An ASP is a form of income drawdown. Instead of buying an annuity at age 75, an individual can continue to invest their pension savings and draw an income from their fund within laid down limits.
The minimum that must be drawn as an income from the fund is 55% of an amount calculated by applying the funds available to a table produced by the Government Actuaries Department (GAD). The maximum is 90%. The GAD table is based on the level of single-life lifetime annuity rates for a person of the same sex and aged 75. No allowance is made in the annuity rate used for any level of annual pension increases.
These rates were introduced with effect from 6 April 2007, following a review of ASPs by the Government. For the year 6 April 2008 to 5 April 2009, the rates were 0% (minimum) and 70% (maximum).
The pension year for an ASP is the 12 months from your 75th birthday and every subsequent 12 month period.
The maximum amount must be recalculated every new pension year. The reassessment continues to be made by reference to an annuity at age 75, irrespective of what actual age you have reached.
Occupational Pension
Occupational pension schemes are pension arrangements that are set up by employers to provide income in retirement for their employees. Although the employer is responsible for sponsoring the scheme, it is actually run by a board of trustees - with the exception of most public sector schemes. It is this board of trustees that is responsible for ensuring payment of benefits.
There are two different types of occupational pension scheme - money purchase and final salary. The following is a simple explanation of how each of them works:
Final Salary
Final salary schemes are sometimes known as defined benefit or salary related schemes. Members contribute to the scheme with the promise of a certain level of pension. The amount of pension payable from such a scheme is dependent upon:
- The length of time served in the scheme (known as pensionable service);
- Earnings prior to retirement (known as final pensionable salary); and
- The scheme's 'accrual rate'. The accrual rate is the proportion of salary that is received for each year of service. So, if the scheme has an accrual rate of 60, the member will receive 1/60ths of his final pensionable salary for each year of service completed.
- Such schemes are not suitable for small companies and are expensive for the employer. Both the employer and employee usually contribute as these are company wide schemes.
or example: pensionable service x pensionable salary
Money Purchase
Money purchase schemes are sometimes referred to as defined contribution schemes. Employers and employees contribute to the scheme, where the money is invested, and build up, for each scheme member, a 'pot of money'. The amount of pension payable from this scheme is dependent upon:
- The amount of money paid into the scheme (by the member and the employer);
- How well the investment funds perform; and
- The 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.
Employee Pension
Why have a pension scheme?
Even young companies and their personnel should think about pension provision. No one can reasonably expect to live in any comfort without putting some form of pension plan in addition to what the State provides.
What sort of pension schemes are there?
Pension arrangements exist in several forms:
1. Defined benefit schemes
In these, members receive a pension based on years of service and salary at their retirement. Such schemes are not suitable for small companies and are expensive for the employer. Both the employer and employee usually contribute as these are company wide schemes.
2. Defined contribution schemes
Otherwise known as Money Purchase Schemes, these provide a cash sum at retirement, which must then be used to buy an annuity. The amount of the cash sum depends upon how the annual contributions to the scheme have been invested and how well those investments have performed. Again, both employer and employee usually contribute as these are company wide schemes.
3. Personal pensions
As the name implies, these are pension schemes set up by an individual for his own benefit and will be with an insurance company. As these are not schemes set up by the employer there is no obligation on the employer to contribute. As only the employee will be contributing, unless an arrangement is made with an employer, the contribution burden for the employee/member to attain the same benefits is higher than under a Defined Benefit or Defined Contribution Scheme in which the employer contributes.
Like a Defined Contribution Scheme, benefits at retirement will depend upon investment performance.
The individual who sets up a personal pension does not need to be an employee. He can be self employed.
4. Group personal pension plans
Although set up as a company wide scheme, GPP s (as they are known) are really no more than personal pensions for employees arranged by the employer on a group basis with a single insurer/ pension provider.
However, the employer may contribute, so it would be less expensive for the employee/ member than a free standing personal pension. The ultimate pension benefits will again depend upon investment performance.
5. Stakeholder
This type of scheme was introduced by the government. Anyone, whether employed or not, may contribute up to £3,600 per annum to a stakeholder scheme. These schemes will be run by insurance companies and a few other institutions, including some trade unions.
Every employer who employs five or more persons and who does not have a pension scheme which is open to all its employees and which provides such other benefits as are necessary to obtain exemption from the stakeholder obligation must afford access to a stakeholder scheme for its employees.
If an employee who could join a company pension scheme chooses, instead, to join a stakeholder scheme, there is no obligation on the employer to make any contribution to the stakeholder scheme.
The workforce will have a right to be consulted as to which stakeholder scheme is selected by the employer.
Self Invested Pension Plan's
What is a SIPP?
Put simply, a SIPP (self invested pension plan) is a pension plan you run yourself, for yourself. SIPPs were set up by the Government in 1990 as a way of encouraging us all to save for our retirement.
SIPPs are different from other personal pension accounts because they allow you much greater flexibility in what you invest. They keep the same tax advantages as other personal pension plans, though, meaning you can still use them to store investments which can be 'sheltered' from tax (ie benefit from special tax rules).
What is a SIPP 'wrapper'?
Just to confuse things, people sometimes refer to a SIPP as a 'wrapper'. In this context, a 'wrapper' is really just another word for a container.
Generally speaking, all the investments you hold inside a wrapper are treated in a particular way. So, if the wrapper has special tax advantages, all the investments inside it would share those tax advantages. (The same would apply to an ISA wrapper, for example.)
So, when people talk about 'wrapped' or 'unwrapped' investments - 'unwrapped' investments are just ordinary investments without any special tax treatment.
What are the benefits of a SIPP?
SIPPs are designed to be a flexible way of earning a tax-efficient return on your investments. Unlike an ISA, with a SIPP you also get full tax relief on any contributions you make to your SIPP.
All your pension contributions qualify for basic rate tax relief.
Here is how it works:
Any contribution you make is net of basic rate tax. This means that if you were to invest £800, an additional £200 would be collected automatically from the Inland Revenue on your behalf, added to your account, and be available to invest 6-11 weeks later. Higher rate tax payers making contributions on their own behalf can reclaim a further 20% through their self-assessment forms.
Income tax
- Your pension contributions qualify for tax relief at your marginal rate (ie the rate of tax you currently pay).
- When you come to receive benefits, you can take out a lump sum (typically 25%) tax free.
- Any income you get from your pension is taxable
Capital gains tax
All your SIPP investments are protected from capital gains tax
What can I invest in?
With a SIPP, amongst other things, it is possible to invest in the following:
- Equities - stocks and shares quoted on the London Stock Exchange
- Stocks and shares quoted on an Inland Revenue overseas stock exchange
- Open Ended Investment Companies (OEICS) and Unit Trusts
- Cash, Gilts and other fixed interest securities
- Commercial Property and land (see below)
- Second hand endowment policies
One of the major investment areas open to SIPPS is property. Essentially, SIPP schemes can own retail or commercial property which can be let to one's own company. This could be of significant benefit compared with letting from a third party as effectively one is channelling rental income into one's own pension fund. Loans to the fund to facilitate such purchases are available.
The basic change is that incoming rent from property held in a SIPP fund accumulates tax free, and capital gains tax on profits from UK property sales will not apply (provided they are kept in the SIPP fund). This is clearly a major change.
How much can I invest each year?
The annual investment allowance is £235,000 for 2008/09 and will increase each year up to 2010/11. The annual allowance may increase in future years, but this is not guaranteed.
Up to 100% of annual earnings receive tax relief up to this limit.
All your pension contributions qualify for basic rate tax relief. Any contribution you make is net of basic rate tax. This means if you were to invest £800, an additional £200 would be collected automatically from the Inland Revenue on your behalf. Higher rate tax payers making contributions on their own behalf can reclaim a further 20% through their self-assessment forms.
For more information on how Gemini can help you and your employees, call us FREE on 0800 255 0123 or [click here] for one of our advisers to contact you.
