Executive Pension Plans (EPPs) - UK Personal Finance on Moneyweb
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Executive Pension Plans (EPPs)
Executive Pension Plans are plans set up by the company in which the contributions build up in a tax exempt fund, and are used at retirement to provide tax free cash and pension.
They are normally established by company directors for their own benefit, but they then frequently include other valued employees, though only the favoured can expect to be given the levels of investment that thee schemes offer.
Funds are normally invested for growth via insurance company investment funds. Make sure that your money is in the right area for you.
Benefits - in general as per Defined Benefit Schemes, but with the previso that you will only get what you pay for. If your fund is too small then you will not be able to have the full benefits that the law is willing to allow.
Regular pension contributions by the employer are tax exempt, ( ie reduce company corporation tax charge). Single premiums under £500,000 ditto, but over this they will have the relief spread over more than one year.
Pension contributions by the employee ( up to 15% of salary) get relief at the persons marginal rate.
Definitions of final salary are by and large up to the scheme controllers. This means that increases in salary make room for increases in pension contribution.
Earnings Cap normally applies and sets an upper limit. Exceptions are for
people who are members of schemes that were begun before 14 March 1989, AND
who themselves joined the scheme before 1 June 1989, AND where the trustees
are willing to ignore the Earnings Cap. Certainly the Earnings Cap applies
to all NEW members of any scheme.
Married members can be given very generous death in service benefits. This can be a very tax efficient method of life insurance given that if the member pays they get 23-40% tax relief on the premiums.
Funding can be made late, and can include periods of trade when you were self employed, if not pensioned( eg by way of PPP ), and provided that the business continued. So a contractor who starts as sole trader and then incorporates is fine, but the grocer who incorporates to run a plumbing business will probably fail. Each case on its merits.
The scheme can make secured loans to the company subject to:-
the loans is for a bona fide commercial purpose
they should not be made on a regular basis
interest must be settled, not added to the loan
loans cannot exceed 50% of fund value ( 25% during first two years of scheme)
Members cannot get loans from the scheme, but the value of their interest in the scheme may be used by a lender to justify a secured loan. See Pension Mortgage.
High Investment Limits
The maximum funding limits are determined by a complex calculation, but in essence very substantial premiums can be made - 25-60% of salary roll.
In the event that company profits are high then a useful trick is for directors to increase their salaries in order to justify higher pension premiums.
Funding for Cash
This is a method that exploits the fact that at retirement, where an Executive Pension Plan is used, the right to tax free cash can be used to its limit, ( i.e. up to 150% of salary ),only using that which remains to buy a pension. Such an offer is very attractive.
It works. It is however simply another way of saying that the person is going to grossly underfund their pension. ( Most advisers who use this do so to sell the idea that some commitment to retirement planning should be made. They then do their best to work the premiums upwards into a serious saving effort).
