Additional voluntary contributions
A scheme member can make an extra payment to a pension through
an Additional Voluntary Contribution (AVC) scheme. For many
occupational pension schemes an AVC is a separate pension operated
on a defined contribution basis and known as an occupational
money purchase where a pension income at retirement is paid
in addition to the main scheme benefits.
Since A-Day, the Pension Simplification
rules introduced from 6 April 2006 allow a tax free lump sum
of 25% to be taken from an AVC or FSAVC.
Previous to A-Day, there was no possibility for commutation
to a tax free lump sum with an AVC and the whole of the fund
value must purchase a compulsory
purchase annuity providing a pension income at retirement
Since 6 April 2006 the Inland Revenue
maximum contributions to occupational pension have changed.
The rules allow an employee to contribute either £3,600
per annum or 100% of their their earnings in order to benefit
from tax relief at their marginal rate of tax. The maximum Annual Allowance will increase in each subsequent
year from the 2006/07 tax year of £215,000. This contribution
ceiling will rise by £10,000 per annum to £255,000
by 2010/11 tax year.
The annual allowance ceiling represents
the combined amount that an employee and their employer can
contribute to pensions during the year without a tax penalty.
Previous to A-Day the maximum contribution was limited to 15.0%
of taxable earnings. If the scheme member exceeds the Inland Revenue limit of £215,000
for the 2006/07 tax year, there will be an annual allowance
charge applied of 40% under self-assessment on any excess contribution.
At retirement age after the member has taken the 25% tax free
cash, it is possible for the scheme member to select an annuity arranged by the provider or an open
market option to secure the highest pension income. An open market option allows the member to select the highest annuties based on their personal needs such as a level or escalating income or enhanced due to a medical condition.
Executive pension plans
Taken out by senior executives or directors, executive pension
plans (EPP) are occupational
pension schemes provided by the employer and operated
by a life assurance company. The employer will provide a contribution
for the member that is deductible against corporation tax.
An EPP is regulated by the Occupational Pensions Regulatory
and will have to pay the general levy unless the plan is written
with one member, in which case it will be exempt.
Although an EPP can be established in addition to any company
group pension it will still be subject to HM Revenue & Customes retirement
benefit maximums for lifetime allowance and annual allowance. An EPP is a defined contribution scheme so whether
the member can realise will
be dependent upon contributions made and investment returns. At retirement the individual can use the pension fund to buy pension annuities and has the option to search for the highest annuity rates using an open market option. Before making a decision at retirement, learn more about annuities, compare annuity rates and secure a personalised annuity quote offering guaranteed rates.
FURBs and UURBs
For directors and senior employees with earnings in excess
of the earnings
cap, a funded unapproved retirement benefit scheme (FURBs)
will allow members to top-up their existing arrangements.
However, FURBs have very different taxation implications than exempt approved
Although the employer contributions are allowable as a business
expense, they are fully taxable to the member as a benefit
in kind. National Insurance (NI)
contributions are payable and no tax relief is available on
any member contributions. There is no ceiling to the level
of funding and at retirement, commutation is available for
the whole pension fund as a tax
free lump sum. For medium to larger employers, an unfunded
unapproved retirement benefit scheme (UURBs)
can provide specific benefits to the employees at retirement.
Neither the employer or employee fund the pension scheme but
a promise to the employee is made for the benefits payable
only at retirement
age. As there are no contributions made to UURBs, there
are no income tax or NI liabilities. When the benefits are
paid at retirement the income and lump sum commuted is fully
taxable to the member and tax allowable for the employer.
An employers pension scheme that combines both elements of
salary pension and money
purchase scheme is called a hybrid scheme. A hybrid scheme
will provide a mix of benefits and evaluates the members pension
fund on both a money purchase and final salary basis.
At retirement or on leaving the scheme early, the member will
receive a fund or income from whichever provides the greater
value. This offers the security of a link to earnings closer
to or at retirement and the member is less likely to lose
benefits if leaving
Small self administered schemes
Following the publication of Memorandum 58 by the Superannuation
fund office, now known as the Pension Schemes Office (PSO),
small self administered schemes (SSAS) were established in
February 1979. A SSAS can have up to twelve members who are
typically controlling directors or senior employees. The SSAS
must receive approval from the PSO, appoint a pensioneer
trustee to oversee the management and regulation of the
scheme and is required to be valued every three years.
A SSAS can be very flexible in terms of the investment choice
as it is not limited to insurance funds and can include loans
to the employer and the purchase of unquoted company shares.
However, a SSAS is an occupational money purchase scheme and
benefits will be limited by PSO regulations based on earnings
at retirement and length of service. There is also the opportunity
for commutation to a tax free lump sum of up to 1.5 times final remuneration.
For a post 89 member, these benefits will be subject to the
Simplified defined contribution
Similar to a personal pension, the simplified defined contribution
scheme (SDCS) has not been very successful compared to other pension
arrangements. Membership to an SDCS is not permitted for
a 20% director and concurrent membership is not allowed except
with a free standing additional voluntary contribution (FSAVC)
maximum contribution to an SDCS is 15.0% for the scheme
member but 17.5% for both the member and employer contributions
combined, including to an FSAVC, with up to 5.0% going
towards a lump
sum death benefit. There are no limits on the retirement
benefits from an SDCS and the member is allowed a 25.0%
commutation to a tax free lump sum.