View more on these topics

Extra, extra, read all about it

I am a director of a family company who has retirement looming in the near future. A director&#39s pension scheme was set up for my benefit 20 years ago, partly to allow the company to borrow money back from the scheme from time to time.

I have now been advised that scheme funds will probably be far greater than necessary to provide benefits at age 60, when I intend to retire. What can I do?

There have been a number of mooted changes to the law in this area and my answer is rather different than it would have been six months ago. The traditional methods of dealing with a surplus in your circumstances would have been one of the following:

Do nothing. Let the surplus accrue and be refunded to the company when you draw benefits. If there are cashflow difficulties, this may be a helpful conclusion as it will provide the company with some badly-needed finance, albeit in a relatively tax-inefficient form.

Increase pensionable earnings. This will increase maximum benefits, as well as raise the cost of providing maximum benefits.

Ultimately, if your earnings are increased by a sufficient amount, the surplus could be eliminated. A knock-on effect would be an increase in your tax-free lump-sum entitlement.

But increasing earnings in anti cipation of retirement does not guarantee there will be no surplus. If investments perform particularly well and/or ann uity rates improve between now and retirement, it is easy to see how further surplus could still accrue by your retirement date. If the objective is to totally eliminate surplus risk, increasing earnings is useful but not a guaranteed method.

Please note that earnings are averaged over three years for this purpose.

Increase earnings and trans fer to a personal pension plan. By contrast, this app roach will eliminate surplus risk.

How ever, to allow the move to take place now, your average earnings over three years will need to be inc reased to the des ired level as a matter of urgency. This is because, prior to the move, a transfer test lin ked to pensionable earnings is applied for directors of compa nies. This test is due to be amen ded by April 5, 2001, when the earnings figure required to allow the transfer of the entire fund will almost certainly inc rease, perhaps substantially.

As long as there are funds available to finance the req uired increase in earnings, then surplus risk will be eliminated after the transfer.

The scheme administrators will produce a certificate showing the maximum tax-free lump sum you can draw from the personal pension plan. The certificate will differ depending on whether you are a pre-1989 or post-1989 scheme member. You are currently a pre-1989 member.

However, in certain circumstances – particularly where the scheme is well funded relative to maximum benefits – the certificate for a post-1989 member will show a higher tax-free lump sum. Since you can opt to be treated as a post-1989 member, this is an area that deserves some attention.

The Inland Revenue rec ently produced draft propo sals regarding transfers between company schemes and personal pensions. Previou sly, a failed transfer test meant the transfer could not proceed. But it has now been proposed that, under these circumstances, the trustees can dec lare the excess fund as a surplus, which will be dealt with in the normal manner, with
the balance then transferred to a personal pension.

Consequently, it will be possible for you to make surplus funds available to your company now, rather than waiting until normal retirement date, and then transfer the balance of the fund to a personal pension.

A further advantage in your case is that the refunded surplus may be used to repay the loan to the scheme from the company. The loan would have to be repaid in any event before a transfer could proceed.

I would point out that these are still draft proposals and there is a possibility that they will not be enacted. In particular, it appears that the DSS may have objections to the possibility of early refunding of surplus. The most appropriate way forward will dep end crucially on your company&#39s general finances.

Recommended

Vavo expands insurance for over 45s

Vavo has expanded its range of personal insurance for those over 45 years of age by offering home insurance and annual and single-trip travel insurance. Vavo expects the new cover to be popular to those of retirement age who the life office claim are regularly denied cover or are over-charged . Backed by Prudential and […]

ScotLife has transfer goal

Scottish Life is off ering a business sol utions pack to help IFAs make the most of the opportunities in the pension trans fer market.The company estimates the pension transfer market is worth £1.9bn and the Transfer to the Winning Team pack is designed to give IFAs guidance on targeting the market.The pack inc ludes […]

Schroder – European Dynamic Growth Fund

Friday, 10th November 2000.Type: Unit trust.Aim: Growth by investing in a portfolio of European companies with good growth potential.Minimum investment: £1,000.Investment split: 100 per cent European equities.Isa link: Yes.Pep transfers: Yes.Charges: Initial 5.25 per cent, annual 1.5 per cent.Special offer: Initial charge reduced from 5.25 per cent to 3.25 per cent.Offer period: Until January 31, […]

E D F & Man has introduced an offshore capital guaranteed bond

E D F & Man has introduced an offshore capital guaranteed bond aimed at high-net worth clients looking for growth. Man-Glenwood nexus guaranteed is the first bond to invest in the Man-Glenwood portfolio, which came into being through ED & F Man&#39s takeover of Glenwood3, an American investment adviser. The portfolio is made up of […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment