Directors' Pensions - Independent Advice on the Options Available

Pensions may have received some poor publicity recently, but they are still one of the most tax-efficient ways to save for retirement. As an employed higher-rate taxpayer contributing to a pension you receive tax relief at the highest rate. If your company pays the pension premium for you, your pension contributions do not attract employer or employee National Insurance unlike your salary.

Tax efficency

Just like other employees, business owners and directors can use occupational pension arrangements to ensure that their personal affairs are structured as tax efficiently as possible. For example, a small self-administered pension scheme (SSAS) allows a company to invest in many areas, including commercial property, in order to build a substantial portfolio of investments that can be used positively by the firm.

Maximum contributions

Under pension legislation that came into force in April 2001, the maximum allowable contribution to defined contribution pension schemes, other than occupational schemes, can be based on the tax year with the highest income in the last five years. This applies to SIPPs, personal pensions and stakeholder plans. It means that if your income is made up of dividends and salary or bonuses, you only need one high salary year in five to maintain a high level of pension investment.

Sophisticated pension planning

Most pensions only offer access to collective investment funds. The more sophisticated pension investor should consider a SIPP, which allows you to bring in other investments to benefit from pension tax breaks and tax-free growth within your pension.

You can achieve even lower maintenance by choosing a pension provider that offers a phasing service. This could mean, for example, that you initially invest in a range of aggressive (higher risk) funds, such as volatile Japanese and US stocks. But in the five years running up to your retirement, you could authorise your provider to reinvest your fund into successively lower risk funds, so that your investments are totally in cash when you collect your pension.

This is a very low maintenance approach and reduces paperwork. An IFA can help you select a company that does not penalise you for coming out early.

Directors’ decisions

Occupational Pension

This is a company pension provided by an employer. The benefit you receive on retirement may be linked to your earnings (defined benefit) or how much money you have put in (defined contribution).

Personal Pension

It is a defined contribution scheme and your final pension depends on how well your pension provider has managed your money.

Small Self-Administered Scheme

An employer’s pension scheme, which can cater for a maximum of less than 12 employees. You have options with this scheme that would not be possible with an occupational scheme, such as making a loan to your own business or investing in your company’s premises.

Executive Pension Plan

An occupational pension scheme for senior directors and company executives, the advantage being that you can usually make bigger contributions, making it suitable for the higher earner.

Stakeholder Arrangements

The newest pension choice, designed by the government with lower earners in mind. Employers who offer no other pension option must now have a stakeholder scheme in place.

Self-Invested Personal Pensions

Known as SIPPs, these pensions enable you to make your own investment choices, which could include buying a property to use as offices and then renting it to yourself. Generally, you need to be making higher contributions to take advantage of a SIPP.

When was the last time you reviewed your pension arrangements? And do you know what level of income your pension is likely to provide you with? For an informed review of your current situation, why not speak to an independent financial adviser for further information.