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Surplus to requirements

I am the owner/director of a small company and am in my early 50s.

I have had a small self-administered scheme for around 15 years.

As a result of some hefty contributions in the early years when business

was good, it is worth around £500,000, including the company premises and

some loans to my company.

However, business has been poor for a few years. As a result, my earnings

have dipped and I do not expect them to recover. I understand this could

cause a major surplus problem in due course and I need some advice.

The surplus issue stems from the link between your pensionable earnings

and the maximum benefits that you may draw in due course.

In calculating your maximum benefits, you can use your highest average

earnings over three or more years ending within 10 years of either:

The date of drawing your benefits, or:

The date of leaving service, if earlier.

Therefore, we can reach back to earnings from five or more years ago,

assuming that you draw benefits at 60.

I would strongly recommend that we conduct a review of your earnings and a

projection of benefits to see which years&#39 earnings are optimal.

If the review finds that your optimal earnings are more than 10 years away

from your normal retirement age, then a number of possibilities arise.

First, you could retire early enough to capture these better earnings

figures. However, you would have to retire as an employee and resign as a

director of the company. This may not fit in with your current plans,

especially bearing in mind the outstanding loans.

Second, you could opt out of pensionable service. This would freeze your

pensionable earnings figures by setting the date of opting out as the point

from which you count back 10 years. However, you would not need to leave

service with the company.

It would not actually guarantee you a surplus-free future as this depends

on investment growth and future annuity rates, among other things.

There is a further alternative which would present you with greater

retirement flexibility and no further problems with earnings levels. This

option is to transfer your fund to a self-invested personal pension plan.

Here, there would be no further risk of surplus following transfer and no

link between drawing benefits and retirement. There are, as usual, some

hurdles to negotiate first.

Before you transfer, there is a funding test to pass, commonly known as

the GN11 test. Only if the SSAS fund is below the transfer test can you

proceed. Even if you pass, you will have to repay the loan before

transferring as a Sipp cannot make loans.

Either of these stages may well present an insurmountable difficulty for you.

However, depending on the current funding position of the SSAS, it may be

possible to arrive at a very convenient solution. An application could be

made to the Pension Schemes Office asking that a refund of surplus be made

now to your company from the SSAS.

At this point, I should stress that there is no laid-down format for

determining and refunding surplus from an SASS prior to retirement and any

approach is a matter for negotiation. Nevertheless such refunds have been

permitted in the past.

The target is to arrange it so that sufficient surplus can be refunded in

order to reduce the value of the SSAS below the Sipp transfer cap. The

refund of surplus received by the company could then assist in repaying the

pension scheme loan, thus freeing the path to a Sipp transfer.

The net effect is that the burden of financing the loan is eliminated and

the prospect of a bigger surplus in the future has also disappeared. Since

the refunded surplus is used to repay the loan, the refund would only have

been taxed once at 40 per cent.

Of course, the procedures in attaining this position are very involved.

There is no guarantee that the refund of surplus will be sufficient to

reduce the scheme&#39s value adequately to allow a transfer to a Sipp or that

the Pension Schemes Office will permit a surplus refund in the first place.

However, bearing in mind the end result, it may well be worth spending

some time exploring this scenario.

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