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Additional voluntary contributions


A scheme member can make an extra payment to a pension through an Additional Voluntary Contribution (AVC) scheme. For many occupational pension schemes an AVC is a separate pension operated on a defined contribution basis and known as an occupational money purchase where a pension income at retirement is paid in addition to the main scheme benefits.

Since A-Day, the Pension Simplification rules introduced from 6 April 2006 allow a tax free lump sum of 25% to be taken from an AVC or FSAVC. Previous to A-Day, there was no possibility for commutation to a tax free lump sum with an AVC and the whole of the fund value must purchase a compulsory purchase annuity providing a pension income at retirement age.

Since 6 April 2006 the Inland Revenue maximum contributions to occupational pension have changed. The rules allow an employee to contribute either £3,600 per annum or 100% of their their earnings in order to benefit from tax relief at their marginal rate of tax. The maximum Annual Allowance will increase in each subsequent year from the 2006/07 tax year of £215,000. This contribution ceiling will rise by £10,000 per annum to £255,000 by 2010/11 tax year.

The annual allowance ceiling represents the combined amount that an employee and their employer can contribute to pensions during the year without a tax penalty. Previous to A-Day the maximum contribution was limited to 15.0% of taxable earnings. If the scheme member exceeds the Inland Revenue limit of £215,000 for the 2006/07 tax year, there will be an annual allowance charge applied of 40% under self-assessment on any excess contribution. 

At retirement age after the member has taken the 25% tax free cash, it is possible for the scheme member to select an annuity arranged by the provider or an open market option to secure the highest pension income. An open market option allows the member to select the highest annuties based on their personal needs such as a level or escalating income or enhanced due to a medical condition.

Executive pension plans

Taken out by senior executives or directors, executive pension plans (EPP) are occupational pension schemes provided by the employer and operated by a life assurance company. The employer will provide a contribution for the member that is deductible against corporation tax. An EPP is regulated by the Occupational Pensions Regulatory Authority (OPRA) and will have to pay the general levy unless the plan is written with one member, in which case it will be exempt.

Although an EPP can be established in addition to any company group pension it will still be subject to HM Revenue & Customes retirement benefit maximums for lifetime allowance and annual allowance. An EPP is a defined contribution scheme so whether the member can realise will be dependent upon contributions made and investment returns. At retirement the individual can use the pension fund to buy pension annuities and has the option to search for the highest annuity rates using an open market option. Before making a decision at retirement, learn more about annuities, compare annuity rates and secure a personalised annuity quote offering guaranteed rates.


FURBs and UURBs

For directors and senior employees with earnings in excess of the earnings cap, a funded unapproved retirement benefit scheme (FURBs) will allow members to top-up their existing arrangements. However, FURBs have very different taxation implications than exempt approved schemes.

Although the employer contributions are allowable as a business expense, they are fully taxable to the member as a benefit in kind. National Insurance (NI) contributions are payable and no tax relief is available on any member contributions. There is no ceiling to the level of funding and at retirement, commutation is available for the whole pension fund as a tax free lump sum. For medium to larger employers, an unfunded unapproved retirement benefit scheme (UURBs) can provide specific benefits to the employees at retirement.

Neither the employer or employee fund the pension scheme but a promise to the employee is made for the benefits payable only at retirement age. As there are no contributions made to UURBs, there are no income tax or NI liabilities. When the benefits are paid at retirement the income and lump sum commuted is fully taxable to the member and tax allowable for the employer.


Hybrid schemes

An employers pension scheme that combines both elements of a final salary pension and money purchase scheme is called a hybrid scheme. A hybrid scheme will provide a mix of benefits and evaluates the members pension fund on both a money purchase and final salary basis.

At retirement or on leaving the scheme early, the member will receive a fund or income from whichever provides the greater value. This offers the security of a link to earnings closer to or at retirement and the member is less likely to lose benefits if leaving service early.


Small self administered schemes

Following the publication of Memorandum 58 by the Superannuation fund office, now known as the Pension Schemes Office (PSO), small self administered schemes (SSAS) were established in February 1979. A SSAS can have up to twelve members who are typically controlling directors or senior employees. The SSAS must receive approval from the PSO, appoint a pensioneer trustee to oversee the management and regulation of the scheme and is required to be valued every three years.

A SSAS can be very flexible in terms of the investment choice as it is not limited to insurance funds and can include loans to the employer and the purchase of unquoted company shares. However, a SSAS is an occupational money purchase scheme and benefits will be limited by PSO regulations based on earnings at retirement and length of service. There is also the opportunity for commutation to a tax free lump sum of up to 1.5 times final remuneration. For a post 89 member, these benefits will be subject to the earnings cap.


Simplified defined contribution schemes

Similar to a personal pension, the simplified defined contribution scheme (SDCS) has not been very successful compared to other pension arrangements. Membership to an SDCS is not permitted for a 20% director and concurrent membership is not allowed except with a free standing additional voluntary contribution (FSAVC) scheme.

The maximum contribution to an SDCS is 15.0% for the scheme member but 17.5% for both the member and employer contributions combined, including to an FSAVC, with up to 5.0% going towards a lump sum death benefit. There are no limits on the retirement benefits from an SDCS and the member is allowed a 25.0% commutation to a tax free lump sum.


Annuity Rates
Single
  55 £4,358  
  60 £4,839  
  65 £5,613  
  70 £6,292  
Joint
  55 £4,209  
  60 £4,644  
  65 £5,193  
  70 £5,860  
£100,000 purchase, level and standard rates
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