I run my own limited company and only pay myself via dividends - what is the maximum that I can put into an executive pension plan without incurring any additional taxation in the form of Income Tax/NICs or ANOther tax?
Is it true that executive pensions are now tied to salary so that a director of a company has to pay him/herself a salary, and subsequently NI/Income tax, so that they cna pay into a pension? Doesn't that defeat the benefit and someone would be better of putting the money into an ISA?
I don't know about "executive pensions" but just about anyone can put
2808 into a stakeholder (3600 gross) without any earnings. Beyond that they need to have had pensionable earnings (salary) in the last 5 years which can support the extra contributions based on their age-related % of salary.
BTW if "I run my own limited company and only pay myself via dividends" you aren't self employed or indeed an employee, you are probably just an office holder. Self employed is usally interpreted as sole trader, in which case you wouldn't have dividends but would have pensionable earnings.
Absolutely right. AVOID EPPs - they are going to shaft many small business owners in decades to come (using the final salary cap and the resulting overfunding which won't be discovered until the very end)
Could you expand on this? Why are EPPs going to shaft etc...? I ask, because I have one that I started a few years ago. At the time I was told it was a good thing to do.
Likewise, I started a EPP back in 1997 but stopped paying into it, because of a downturn in my business, at the end of 2001. I am reading more and more bad news about them plus, although I know the market has been bad, my one with Standard Life - supposedly the best at the time - has just appeared to stand still.
The bad news though, from what I can gather, is due to changes that Gordon Brown made in recent years. Frankly, if I could magic my EPP into an ISA now I would. Bloody heck, when I was working without a pension I went for, at the time considered the best, with Equitable Life and then, when I set up my own business, all the advice was to get an EPP with Standard Life. They can't expect us - the general public - to be foretellers of the future but the way in which rules keep on being changed makes me serious wonder the benefits of investing in a pension at all as opposed to ISAs, shares generally, property and such-like.
I am no expert (Gareth where are you just when you are needed? :)) but...
With an EPP, as they were when widely sold in the 1980s, you could have drawn say £20k in salary and under the de minimus rules (as they then were) the company could put another £20k into your EPP. This resulted in a rapid build up of the pension fund, while avoiding corporation tax on a lot of profits (very nice).
In the 1990s the Revenue amended the de minimus rule and reduced the maximum contribution (as a % of salary). This made the EPP a lot less attractive but IIRC the max contrib (as a % of salary) was still more than with a PP.
The PROBLEM is OVERFUNDING. This is when the pension fund is too big relative to what you are allowed to draw out as a pension (via an annuity purchase).
With a PP there is no limit on the output so a PP cannot get overfunded; if you now have £10M in your PP but have not earned a penny in the last 25 years (unlikely but possible with a self managed PP fund and an incredibly smart choice of investments) then you will get a huge pension!
With an EPP the maximum output is limited (capped) by a formula which is based on the best 3 out of the last 10 years before you retire. You can choose the 3 years but if you have not earned much from that company in the last 10 years then you are slightly stuffed! In extreme cases much of the fund is forfeited. This is a real gotcha which the salesmen never used to mention. I did some research and it is possible to set up another company, put a load of your money into it, draw it out as salary (and pay the NIC and income tax all over again!) and use the resulting salary to unlock the pension fund - this is very expensive.
If you had been stuffing £ for £ into an EPP for some years, and then stopped working, your fund will have far too much money in it and will get capped. The excess money goes back to the company (less a hefty tax charge because they got CT relief on it originally) and if the company is no longer trading (more than likely when you retire!) the excess money is kept by the... wait for it... insurance company!
But even if you contributed under the newer rules, you can still get capped by the final salary formula if your earnings during your final pre-retirement years are low (quite likely).
The obvious thing is to transfer the EPP to a PP but the Revenue are wise to this (because historically an EPP could be stuffed with a lot of money while a PP could not, whereas a PP has a strict input limit but no output limit, so everyone would have stuffed money into an EPP and then transferred to a PP to retire) and the transfer has to pass an overfunding test called a GN11 test. This is complicated and one needs a specialist to work it out - one "IFA" worked out for me that I had to draw £124k from my (second) company to pass GN11 whereas the true figure was about £15k... (his error was caused by not realising most of the fund value was investment growth which doesn't count, or something like that).
My personal view is that with today's input limits an EPP is a complete waste of time. A straight PP is much better, you can use online self-managed schemes like sippdeal.co.uk, and anyway one should have a mixed long term investment strategy of combining a PP, ISAs, etc. In your old age, you don't need a pension; you just need money :) The biggest financial risk in life is a divorce and a pension fund is very exposed to that.
AFAIK the only remaining usefulness of an EPP is that the company can use the pension fund to purchase freehold premises for itself; such premises do not appear on the balance sheet so if the company is the target of litigation etc the premises are secure. In fact the company is far less likely to become the target of major litigation if it does not show as having freehold premises!
The salesmen used to say you can also borrow money from the EPP, and that it could be done interest-free and never be paid back; in effect the pension contribution could be pocketed tax-free by the individual. This was a complete con, but in the old days (pre-1990s) the Revenue didn't have the resources to keep tabs on it.
Thanks for the information. I suppose I am not the only one of potentially hundreds of thousands of self-employed people who were not made aware of this. Strewth! So I have been putting money into an EPP since 1997 for little gain. This fecking country! Sorry, but this is nonsense - not what you are saying but the ways in which the small guy is screwed.
I can't believe that I have been saving into a p ension which, ultimately, might not give me anything back!
This is a problem only if you have overfunded it. Of course you won't know that you have until a few years before you retire, so if this is a concern (it would be to me) I would do a transfer to a PP while you are still earning plenty; the GN11 test is easy enough to pass if your earnings are high enough right now.
As I've said, with a PP you get online options where you can trade in unit trusts and individual shares very easily and cheaply. This isn't for everybody but it is really pretty easy to just buy up some trackers etc; the L&G one charges only 0.2% which is a good deal less than the charges you will pay on a traditional pension.
I forgot one other thing about an EPP: the company, having used the money to purchase freehold premises, pays rent for the premises, which provides a good "investment" for the EPP fund ... but one should never use tax issues to drive one's investment strategy, especially a long-term one.
Thanks, well no danger of my EPP being overfunded, and certainly not now I've read that. My long term plan is make enough through working that a pension isn't an issue. I guess many people on this newsgroup have the same approach. Its risky, but I'd rather put all my investment into the business and trust that my ideas work out.
So, basically, I should make some enquiries with a financial adviser about what to do regarding moving this? Problem is, I was advised by a financial adviser to take out an EPP originally and, because of recent years, I have, like many people, grown very wary of them.
As I said previously, I am with the Standard Life and, well, the money did not seem to grow that well in the period 97 - 2000 prior to the crash when the market was booming. I am not going to act in haste but I am looking seriously now at my investments and thinking how best to maximise these going forward.
I'm a bit in a similar situation, ltd co but now the sole employee/director. ISA route is fine but limited to the 7k.
The attraction of, in my case, personal pension is that I can reduce profit. However, AXA & Standard Life - grrrr :(
So would you suggest the company invests in UT's or me as an individual? Or maybe some alternatives?
Please don't say "go to my IFA" who recommended that I go Personal Pension in the first place. I'd rather take my chances with recommendations from here.
Well thats largely up to your preferences. Property is a bit more risky at the moment, IMO, but the point is, invest in what ever you want. Just make sure you dont put it in a 'pension' wrapper.
AFAIR there is a proposal for *all* pensions to move to a new scheme where there will be only one cap, on the total value of the pension fund - IIRC the initial proposal is £1.4 million. Wait for the budget to see what actually happens.
The 1.4 million *is* the overfunding test, amounts over that would be refunded less a tax charge to claw back the tax relief. In some ways it's a bit tough on people who happen to get very good investment performance, but it would certainly be easier to understand than the current system. I think the argument for that limit is that the current salary cap is about £100k, you can have a pension of 2/3 of that so about £70k, and with an assumed annuity rate of 5% (which is on the low side) you get £1.4 million. There has been some dispute about how many current pension funds would be affected by changing the limit, the Treasury claim it isn't many but some people have been arguing that the fund cap needs to be higher.
While 1.4M is plenty for now (and anyway anybody with half a brain will have other DIY investments of their own) it is likely to be a slippery slope - if they don't up the 1.4M with inflation, in years to come it will not be much. It will in effect prevent high earners (who don't vote Labour anyway) accumulating pension funds commensurate with their earnings.
The trouble with shafting high earners is they are the most physically / financially mobile people in the country, and they will simply readjust their affairs to suit. This may mean setting up a business in another country, for example.
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