MANY factors will contribute to your pension provision: age and salary, for example, and the position held at work.
Employees are restricted to the choice of company or personal pension plans; company directors have more scope. Aside from self-invested personal pension plans, they may invest in pensions through Executive Pension Plans (EPPs) and Small Self-Administered Schemes (SSASs).
``Contributions to a personal pension plan are dependent on the person's age and salary - up to a maximum limit,'' said independent financial adviser Tim Purdon at Glasgow's Gibson & Partners.
``The other plans are geared to provide a benefit of up to two-thirds final salary on retirement. For this reason contribution levels allowed to EPP and SSAS are invariably more than the personal pension plan maximum.''
For the company director simply looking for a tax-efficient way of saving limited contributions, a personal pension plan would be quite adequate. Self-invested personal plans may offer more flexibility where funding for maximum benefits is not available.
Where company directors are concerned about how much money they can invest in schemes as time goes on, they are opting for the potentially greater benefits of EPPs and SSASs.
These schemes have the adaptability to cope with changes in circumstances. This means that even if the funds for maximum contributions are not available when the scheme is set up, the company director can plan for maximum benefits in the future.
Both types of scheme have the added appeal of tax-efficiency. ``The EPP has always been recognised as an essential element in the area of tax planning when dealing with small, director-controlled companies,'' said Purdon.
``It has been seen as an efficient means of moving profits within a company from a taxed environment into the shelter of a tax-free growth area, with the availability of part of these funds being paid to the directors tax-free at retirement.''
The EPP, however, has come under fire for its lack of director control in investment decisions and the potential for lack of access to money invested in it. When deciding which scheme to go for, company directors should consider whether they want to be involved with investment discussions and the importance of investment flexibility. They should bear in mind any possible future property purchase and whether the pension fund will be used for loan-back facilities.
It may be that an SSAS would be more suited to their requirements. There are two main types: hybrid SSASs often involving insurance companies, while the full SSAS generally does not.
``Both types allow schemes to invest in assets other than pension policies,'' said Purdon. ``This means a scheme does not have to lock up the pension fund until retirement.
``Pension fund assets can be used to help with property purchase - additional factory space for example - or to help company development through funding research. In the first instance the pension fund owns the property. In the second, the fund loans money to the company so it can embark on research.''
Loans taken from the fund should be no more than 25% of the value of the fund in its first two years, and 50% thereafter. They should also be of a commercial nature - the pension scheme should benefit from the interest received and the company from the fact it is paying a commercial loan back into its own pension scheme.
If the loan is used to buy property, the company's net asset value will be reduced - but there will be possible capital gains tax advantages. The value of directors' holdings will be reduced, but this should be more than offset by their tax-free pension funds.
Compared to corporate or private ownership of property, this approach makes an already tax-efficient situation even more attractive to company directors, by bringing a tax-efficient investment into the tax-free environment of a pension plan.
Recent substantial pensions legislation has placed new limits on schemes and how much money can be paid into them. ``The SSAS approach, however, still offers greater investment choice,'' said Purdon.
``Company directors should not effect a scheme without considering all the pension options available. After all, a pension is for life.''
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