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' 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's 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.