An Executive Pension Plan (EPP) is an occupational money purchase arrangement(investment linked pension scheme) normally used for Directors and senior employees. It is alternatively known as a One Man Pension Arrangement (OMPA).
It is common for many company directors or senior executives to be members of an EPP or its equivalent which allows direct investment into wider areas such as shares or commercial property usually wrapping your EPP inside a Small Self Administered Scheme (SSAS).
Executive Pension Plan Loan - It is also appealing to company directors and senior executives as rules allow that any funding which is made into a scheme may be made available to the sponsoring employer company in loan facilities. This is called Loanback where the EPP can lend money commercially to your business.
EPPs are about control. You control the retirement date, the contribution levels and investment choice. It is a separate scheme from any scheme that you may choose to run for employees and therefore, it is confidential.
New or old pension rules? Some people may still have their executive pension preserved under the old rules available before April 2006, others may now be subject to the new rules or be required to adopt the new pension rules. These are complex and we suggest you contact us for advice.
Executive Pension Rules From April 2006
Who can have a executive pension plan?
Under Pension Simplication rules you are now eligible to contribute to such a plan if you are a UK employer or a UK Relevant Individual who is employed in the UK and receive tax relief on contributions made. The executive pension plan must have an employer involved as it is technically a Company Pension Plan.
What can I pay into an executive pension plan?
You are allowed to contribute premiums to as many Executive Pension plans or indeed any other pension plans as you want up to the Annual Allowance. The Annual Allowance started in 2006/07 at £200,000 pa but then reduced to £50,000 and £40,000 at April 2014. This means you and your employer may be able to pay huge sums into your pension without any complex calculations.
How much should I save in my executive pension plan?
This is a personal choice based on what you can afford. We have produced a number of pension calculators to help you decide.
What happens to my money that I have paid in?
Your pension money is invested normally in collective funds with other pension savers. You technically buy shares known as 'units' in the pension fund. Pension funds invest in a wide range of areas such as cash, property, fixed interest stock, bonds, shares, overseas shares and much more.
How does my executive pension plan fund grow?
If the value of an asset owned by the pension fund goes up in value e.g. a Shopping centre owned by a pension property fund, then the 'unit price' value of your 'shares' or 'units' in that fund goes up.
When can I retire from an executive pension plan?
You used to be able to retire from age of 50 before April 2010 but now age 55 after April 2010.
What happens to my executive pension plan at retirement?
At retirement you are allowed to receive a tax free lump sum of 25% of the fund value and the balance can then be used to purchase a retirement income. Think of it like investing money in a bank account, you cannot have the money back and you receive income on the money you invested.
There are three types of income style at the chosen retirement date; some are more risky than others: Secured Income (an annuity), Unsecured Income and for some over 75's Alternatively Secured Income.
What is the maximum pension I can receive when I retire?
There is now no maximum pension you can receive at retirement. Your pension income depends upon the size of the fund that you have built up and then what income/interest rate that fund can then pay out. If your fund grows to a huge fund there may be tax penalties if it is above the Lifetime Allowance.
The Lifetime Allowance started in 2006/07 at £1.5m and used to increase every year but now it has been reduced to £1.25m. You have the choice of buying an annuity income at retirement or not buying an annuity but using Capped Drawdown you will have a choice of income levels from £0 up to 120% of the Government's Standard Annuity Level for your age.
What happens if I die?
If you die before you have retired ie not taken income or tax free cash from your pension your heirs will normally receive the whole pension fund as a lump sum. If you die and you are already receiving benefits, cash or pension or both, if it is Secured Income (annuity) your heirs may or may not be able to receive a balance of the fund paid depending upon the type of annuity you invested in. If you die and you are receiving benefits under Capped or Flexible Drawdown you heirs may receive some or all of the fund subject to tax penalties and/or inheritance tax.
Can I have Life Insurance Cover?
Most Executive Pension plan providers can offer you Executive Pension Plan life cover. This means that the premiums you pay for life insurance receive tax relief on them. If you die and your heirs receive Pension Life Cover pay outs plus the value of the pension fund. If it exceeds the Lifetime Allowance there will be a tax charge.
How can I get one?
Purchasing executive benefits whilst a simple process, requires some professional advice as there are certain areas that have to be researched. To this end, we do not allow people to buy executive arrangements direct from this site. We ask that you contact us to take some professional advice, either over the telephone or via a face to face meeting. Contact us now.
THERE IS ALSO A SPECIAL EXECUTIVE ARRANGEMENT WHICH ALLOWS A FAR WIDER INVESTMENT RANGE CALLED A SMALL SELF ADMINISTERED SCHEME (SSAS).
This type of pension scheme could even buy your commercial property and rent it back to your company. Take a look at the SSAS section.
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Many people will have older style pensions that depending upon their circumstances they may or may not have had their old pension rules preserved
Generally, the maximum that could be retired on from an EPP was 2/3rds of final remuneration after 10 or 20 years service (depending on when you joined the company ) and a maximum tax free cash of up to 1.5 times salary or 2.25 X the pension, whichever is the greater, again depending on when you joined the company.
There was flexibility on how most people were allowed to calculate their final remuneration for the purpose of calculating maximum pension benefits. However, Controlling Directors were only allowed to use the following definition:
Salary Calculation for Directors Pension Benefits
Must be the average salary of 3 consecutive years salary ending no earlier than 10 years before the normal retirement date. There are many more rules affecting Directors. Please visit the Directors Page (in the Individuals centre for more).
Directors were not allowed to contribute to Additional Voluntary Contribution Schemes if they had a shortfall in their pension, e.g. you may have wished to retire earlier or have started pension planning late. However, you were able to contribute towards the maximum pension benefits allowed by the Inland Revenue to retire after either 10 or 20 years (depending on when you joined the company).
To this end they were very flexible and larger contributions could be made by the individual or the sponsoring employer. This would involve doing a complex 'maximum funding check'.
This was where you were required to do a calculation based on your age, salary, service, any previous pensions you have built up, if you require a spouses pension benefit etc. Upon doing this calculation, we then had to arrive at a maximum contribution level you were allowed to make as a one off payment, as a regular payment or a combination of the two.