Directors executive pensions – don't lose your protected tax free cash entitlement
We were introduced to a successful limited company by an accountant. We were asked to review the pension arrangements of the two directors. The limited company had been making pension contributions to an executive pension plan for both of the directors for the last 16 years. During this period of time the directors had taken their remuneration in the form of high salaries and dividends.
The directors were aware of the changes in pension legislation in April 2006 and wanted to know if they should do anything with their plans.
Once we had received all of the information back from the insurance company it allowed us to determine the following:
- There were no forms of guarantees within the existing policies – many older plans may have these.
- There was a limited range of investment funds available.
- The policy charges were high, due to being an old style pension.
- There was no facility at retirement to leave the funds invested and take an income – income drawdown (now known as unsecured income).
We listened to the individual objectives of each director before making our recommendations. Director A wished to transfer to a stakeholder pension and Director B wanted to transfer to a Self Invested Personal Pension – SIPP. If they had taken these routes, they would have individually transferred their pensions and this would have restricted their tax free cash entitlements to 25% of the fund value. We had calculated that, for each director, the tax free cash entitlement under their existing arrangements was in excess of 50% of their current fund value. This was based on their length of service, time as a member of the scheme and remuneration during this period.
The directors benefited both jointly and individually from taking our advice to implement a block transfer to a SIPP. The joint benefit was they both protected the tax free cash entitlement of over 50% of their fund. This enabled each director to have over £200,000 tax free cash instead of approximately £100,000.
As for individual benefits, Director A did not have a stakeholder pension but he was able to maintain his pension in a deposit fund, as he had become nervous of the World Stock markets. The SIPP was as cost effective as a stakeholder pension, due to the fund size. Director B had all of the facilities and features of a SIPP – being able to invest in a wide range of assets from leading investment managers. In the future he would be able to access income drawdown. Therefore, both directors’ objectives were achieved.
The above case study is for information and illustration only. It is not intended to be individual advice and it should not be taken as such. If you have any questions relating to your own circumstances, please contact us.