Are your business owner clients restricted by the Annual Allowance rules?

by Abbie Knight | 25/09/2018 | Insights

FOR PROFESSIONAL ADVISERS ONLY

Scenario 1. Are your business-owner clients finding the Tapered Annual Allowance (AA) restrictive to their pension funding plans?

The answer to those impacted by Tapered AA rules could be for their company to consider establishing a Rowanmoor Defined Benefit SSAS (DB SSAS) and funding pensions via targeted defined benefit deferred scheme pension promises. For example:

Jim, who is 48, has had a profitable year in business. His Limited Company made £200,000 in profits. Jim wishes to fund as much of this into pension as he can as part of his overall remuneration plan for the tax year.

  • He has fully utilised his AA in previous years up to and including 2015/16 but has not yet utilised 2016/17 or 2017/18 or 2018/19 AA.
  • Jim’s AA in 2016/17 and 17/18 was tapered to £10,000 in each year, due to the size of his taxable income.
  • In 2018/19 Jim’s taxable income will not be above the threshold limit of £110,000, meaning he has the full £40,000 AA available.
  • Overall, Jim has £60,000 AA to work with.

Jim’s company can establish a Rowanmoor DB SSAS with Jim as the sole initial member, or add further members over time, up to a maximum of 11 members, to meet small scheme rules.

The DB SSAS can convert Jim’s £60,000 available AA into the scheme providing a defined benefit deferred scheme pension promise of £3,750 p.a. from a chosen retirement date (calculation is the AA divided by 16).

If his retirement date was 55, assuming the defined benefit pension included in payment assumptions of 100% widows, Limited Price Indexation and a 10 year guarantee period, the company contribution required to be paid into the scheme could be up to £180,000.

This is in contrast to the £60,000 permitted contributions, the company would have been able to make into a SIPP, or any other conventional defined contribution scheme.

The DB SSAS therefore can generate a 3 time greater permitted contributions, compared to the SIPP, or defined contribution (DC) route.

Please remember that a DB SSAS will require a long-term commitment to investing in a pension for the benefit of the members and that other pension solutions should be considered. A DB SSAS may require client to receive ongoing investment advice and fund performance might not allow delivery of the defined benefit.


Scenario 2. Are your business-owner clients now impacted by Money Purchase Annual Allowance (MPAA) rules, when still wishing to make pension contributions in a profitable business year?

The current MPAA limit in terms of pension input contributions is £4,000. In 2017/18 it was £4,000 and in 2016/17 it was £10,000. However, this limit only applies to clients who are funding into a DC plan or scheme, such as a SIPP, GPP, SSAS, Personal Pension etc.

The Rowanmoor DB SSAS offers an alternative pension input solution to use up their available 'Alternative AA'. Meaning, those clients who can access a defined benefit scheme such as the Rowanmoor DB SSAS, have the potential to utilise a larger annual allowance than the one they may have thought they were being restricted by, via pension inputs into a Defined Contribution scheme.

Alice, who is 56, has had a profitable year in business. Her Limited Company, under her sole management has reported a £350,000 profit, which can potentially form part of her overall remuneration for that year. She has not previously and will not in 2018/19 be impacted by Tapered AA rules.

Alice had fully utilised her available AA up to and including 2015/16.

Alice triggered the MPAA in 2016/18 when she took flexible benefits from her SIPP of her lump sum and a small amount of taxable income. The MPAA in that tax year was £10,000 so her company contributed this sum into the SIPP in 2016/17.

In 2017/18 the MPAA was reduced to £4,000, so her company contributed this sum into her SIPP in 2017/18. In 2018/19 the MPAA was still £4,000 and therefore her company contributed this sum into her SIPP.

When Alice triggered the MPAA, she did not realise she could have considered using the ‘alternative AA’ by becoming a member of a defined benefit scheme. She thought such schemes were only available for large numbers of employees. Her adviser confirmed she can still access a small self-administered version of a defined benefit scheme and carry forward unused alternative AA and the current tax year’s unused alternative AA.

Alice’s company elected to establish a new 1 member Rowanmoor DB SSAS for her. Her alternative AA from the last 3 years, plus 2018/19 tax year comes to £ 102,000 (2016/17 = £30,000, 2017/18 = £36,000, 2018/19 = £36,000).

This £102,000 alternative AA, when converted into a defined benefit (AA divided by 16) deferred scheme pension comes to £6,375 p.a. A company contribution of up to £306,000 could be made (based on retirement date of 58) to meet the defined benefit deferred scheme pension promise.

Alice is a controlling director and so her company would make the contribution using wholly and exclusive basis as part of her overall remuneration plan for 2018/19.

The Rowanmoor DB SSAS therefore represents a new funding route for Alice to accrue a new and valuable pension benefit in retirement, whilst assisting Alice in a new way of managing a wholly and exclusive qualifying expenditure within the business.

Please remember that a DB SSAS will require a long-term commitment to investing in a pension for the benefit of the members and that other pension solutions should be considered. A DB SSAS may require client to receive ongoing investment advice and fund performance might not allow delivery of the defined benefit.

If you would like to know more, please contact us and our team will be happy to discuss this further.


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