The small self‐administered pension scheme

Pages20-21
Date01 October 1980
Publication Date01 October 1980
DOIhttps://doi.org/10.1108/eb057153
SubjectEconomics,Information & knowledge management,Management science & operations
The
small
self-administered
pension scheme
Special report by
Peter
C.
Price,
Chief Executive,
C.T. Bowring &
Layborn Limited,
and Council Member,
Society of Pension
Consultants
ANY astute businessman appreciates
the taxation advantages
of
pension
schemes: within limits, money paid
into them
by
members
and
companies
are deductible before assessment
to
tax; income
and
capital gains from
scheme investments
are
tax-free;
tax
free lump sums
may be
paid
out on a
member's retirement
or
ealier death-
up
to one and a
half times
and
four
times remuneration respectively;
at
retirement members
can
have
a
pen-
sion
of up to 50% of
remuneration
in
addition
to the
retirement lump
sum,
with pensions
at a
slightly lower level
for surviving spouses
and
dependants;
all these pensions-which
can be
infla-
tion proofed
- are
taxed
as
earned
income.
Before
1973,
controlling directors
of companies were specifically
excluded from
a
company pension
scheme.
How
galling
to the
entrep-
reneurial small businessman: devot-
ing more time
and
effort
to his
busi-
ness than anyone else, permitted
to
make provision
for
his employees,
but
prevented from using pension scheme
legislation
to
help solve
the
small
businessman's perennial problem
-
how
to
arrange
his
affairs
to
obtain
a
satisfactory income
for
life
and
pass
the business
on
intact
to his
heirs.
The
1973
Finance
Act put
this
right. Controlling directors could
enter
the
company pension scheme
or
have
a
separate scheme
for
them-
selves. What
a
bonanza
for
insurance
companies.
But
all was not
sweetness
and
light.
Enormous premiums
are
often
required
to
make advance provision
for
the
substantial levels
of
benefit
which
the
Superannuation Funds
Office
(SFO) of the
Inland Revenue
permit,
so the
small businessman
had
a
new
problem: striking
a
balance
between
the
operational needs
of his
business,
his
immediate needs
by way
of remuneration, building
up a
satis-
factory fund
for his
retirement
and
providing
for the
needs
of
his
family
in
the event
of
his premature death.
The penny eventually dropped:
why
not
reinvest part
of the
pension
scheme monies back into
the
business
instead
of
paying them over
to an
insurance company?
The
small
self-
administered pension scheme
had
arrived.
But debate about whether invest-
ment
and
pension scheme money
should
be
through
an
insurance con-
tract
or by
building
up a
fund without
insurance
is not new.
Traditionally
the arguments have centred
on
insur-
ance company guarantees, security
of
capital, operational costs, investment
performance
and
flexibility.
But
most
commentators have
in the
past con-
ceded that size
is
important
to the
argument:
the
smaller
a
scheme
the
more important
the
insurance con-
tract guarantees
and the
less able
the
scheme
to
carry
the
risks
of
large
death claims
itself. The
result: until
very recently,
a
scheme covering
a
dozen people
was
insured.
Now that
it
is respectable
to
suggest
-more often
and
more clamorously-
that insurance
is not
always essential
for small schemes,
we
should remind
ourselves
of the
sole change
in the
ground rules: since
1973
controlling
directors
may
participate
in
pension
schemes. Perhaps therefore
we
should establish some principles.
It must
be
ill-advised
for a
small
pension scheme designed
for
emp-
loyees
who do not
have
a
material
financial stake
in the
sponsoring com-
pany
to
invest substantially
in
that
20 INDUSTRIAL MANAGEMENT
+
DATA SYSTEMS

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