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Surpluses and minuses

I recently sold my business after running it for 30 years. When I was a director, I planned for my retirement by making substantial contributions to a pension scheme. My pension adviser now tells me there is a possibility of a surplus arising.

Of particular concern to me is the fact that, as I understand it, a surplus is refunded to the company that set up the scheme, regardless of any intervening change in control. Is this true? If it is, what can be done to help preserve any surplus in the scheme for my benefit?

From the papers you passed to me, it would appear that your scheme is a company-sponsored pension arrangement and thus, in theory at least, a surplus can arise.

The salary and service figures you provided to me indicate that there is, in fact, a substantial risk of surplus in the near future. If a surplus does arise, this would be refunded to the company less a tax charge of 35 per cent.

Normally, one approach to mitigating a surplus is for the member&#39s earnings to be increased. However, this clearly cannot happen as you have severed links with the company.

The neatest solution would be for you to transfer your company pension into a personal pension arrangement where there is no risk of a surplus arising. There are some possible disadvantages in relation to the size of your tax-free lump sum and also the shape of any death benefits if you were to die before drawing your pension. But, compared with the real benefit of avoiding the loss of surplus, these are probably relatively minor inconveniences.

The main problem with this route is the need for a funding test prior to transfer. The funding test prevents directors of companies from moving well-funded company pension benefits into the surplus-free environment of a personal pension plan. In your case, it is highly likely that you will be caught by this test and prevented from transferring. Under these circumstances, the personal pension plan is of no use.

The surplus issue should have been dealt with at the time of the sale of the company. Bearing in mind that this is a fairly common situation, you may find there was a relevant clause inserted in the sale agreement to cover such an eventuality. The clause would normally bind the purchasers of the company to return to you any surplus, less tax. I strongly recommend that your legal advisers examine the agreement carefully to see if this matter was dealt with at the time. If no such clause were inserted, there may be a charge of a lack of professional care against your advisers at the time of the sale.

Developing this point further, I should add that, even if there is such a clause, there are still scenarios where you would fail to benefit from a surplus arising in the scheme. First, the purchasers of the company could theoretically sell the company at some future date. The eventual owners of the company would not be bound by the same sale clauses and would, therefore, not be under any obligation to return the surplus to you.

Even if your legal advisers were far-sighted enough to cover such an eventuality in the sale agreement, this would normally take the form of a requirement for the purchasers to use their “best endeavours” in perpetuating the obligation to return the surplus – which is not quite binding.

Alternatively, the purchasers could mismanage the company to the point of bankruptcy, at which point a surplus would be very difficult to recover.

Finally, the purchasers could merely go against the requirements of the sale agreement and refuse to refund the surplus. This would put you in a position where you would have to commence legal action for recovery – a potentially expensive procedure which you would have to undertake at a relatively advanced age.

One alternative route you may wish to pursue is to replace the company as principal employer with a new company, perhaps one owned or run by another member of your family. If this could be organised, then a surplus refund could be made to that employer rather than your previous company.

This would almost certainly require the agreement of the purchasers and any attempt to persuade them accordingly could well arouse their suspicion over your ulterior motives. I would imagine that, were they to suspect that a surplus is looming, they would be very unlikely to disassociate themselves from the scheme.

This is the type of negotiation which will require professional assistance. There are also other matters to consider were such an approach to be followed.

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