Unlimited Pension Contributions?

[IR35 Avoider]

The official PCG advice (as I remember it) is that a contractor-director who is the sole fee-earner can have his company pay contributions as big as he likes and they will not be disallowed as an expense for Corporation Tax. HMRC apparently will not disallow a pension contribution in circumstances where they would have allowed a salary payment of the same amount.

The PCG's advice addresses fears raised by HMRC internal guidance, the same guidance that has been quoted and linked to earlier in this thread.

A search yielded this. HMRC now make it clear that it is the overall size of the remuneration package that matters, the split between salary and pension is irrelevant. It seems fairly obvious that the PCG advisers must be right in saying that remuneration paid out of fees generated by the employee being remunerated can never be excessive.

[IR35 Avoider]

You are absolutely wrong

Here's the relevant guidance from HMRC:

http://www.hmrc.gov.uk/practitioners...d-pensions.htm

Everything you quote is the original HMRC guidance that got everyone worried in the first place, my understanding is this has now been answered by HMRC clarifications since that guidance was published. See my comments above.

[IR35 Avoider]

This page is useful.

HMRC now say (with regard to employees generally)

There is no objection to the employer's pension contributions being increased as part of a salary sacrifice arrangement. It is the remuneration package as a whole that will be reviewed.

And more specifically, they say the following with regard to controlling directors.

One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer's trade.

[rootsnall]

IR35 Avoider, are you saying that the HMRC guidance quoted below has now been officially replaced !?

""* Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or National Insurance planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it. ""

[IR35 Avoider]

The official part of the web site contains virtually no guidance at all, it merely says some will be published in the near future.

The text you quote is still in a page on the IR web site, however I think the page may be obsolete. I was unable to fund an active link to it in the practioner section of the web site. I believe that text is from the draft guidance published in January this year. The link that Xoggoth provided was to the subsequently revised version of that guidance, and this does not contain the text you quote. (Compare sections 46025 in both documents.) I was able to find a link to Xoggoth's document in the relevant portion of the site. The page containing the link refers to the guidance having been revised since January. (Just to clarify, I am able to navigate to that page from the top of the practioner section of the site, something I couldn't do for the other page, alhough it's possible I just didn't try hard enough.)

In other words, the text you quote has been replaced, though neither the old nor the replacement versions are/were "official", they are just different drafts of guidance that has yet to be officially incorporated into the online manuals.

[rootsnall]

The official part of the web site contains virtually no guidance at all, it merely says some will be published in the near future.

The text you quote is still in a page on the IR web site, however I think the page may be obsolete. I was unable to fund an active link to it in the practioner section of the web site. I believe that text is from the draft guidance published in January this year. The link that Xoggoth provided was to the subsequently revised version of that guidance, and this does not contain the text you quote. (Compare sections 46025 in both documents.) I was able to find a link to Xoggoth's document in the relevant portion of the site. The page containing the link refers to the guidance having been revised since January. (Just to clarify, I am able to navigate to that page from the top of the practioner section of the site, something I couldn't do for the other page, alhough it's possible I just didn't try hard enough.)

In other words, the text you quote has been replaced, though neither the old nor the replacement versions are/were "official", they are just different drafts of guidance that has yet to be officially incorporated into the online manuals.

I doubt we'll get a definitive answer any time soon or probably ever, that would make things too easy for all concerned.

If it was deemed acceptable I reckon I would be putting all my gross earnings into a pension for the next year or two meaning zero tax or NI for the taxman and I'm sure they won't allow that one way or another. Saying that they are starting to backtrack on the new 'simpler' A Day pension rules by saying that you will have to take out an annuity at 75. I don't understand why they are doing this as its the insurance Co's who plunder your pension pot rather than the taxman getting 35% of what is left when you snuff it.

[IR35 Avoider]

Saying that they are starting to backtrack on the new 'simpler' A Day pension rules by saying that you will have to take out an annuity at 75. I don't understand why they are doing this as its the insurance Co's who plunder your pension pot rather than the taxman getting 35% of what is left when you snuff it.

I don't have a problem with buying an annuity. I think the popular prejudice against them that has developed over the last several years is based on lack of understanding of a number of issues surrounding annuities. For example, the idea that the insurance company profits if you die early is mostly wrong. Obviously they make some profit on all business they do, but in a competitive market for annuities the majority of funds from people who die earlier than average will be paid out as extra income to people who live longer than average. For every pound that someone "loses" when they die early someone else will "win" an extra pound over and above what they deserve based on their pension pot. Since you don't know in advance which group you are going to end up in, buying an annuity is a perfectly reasonable "gamble"; in fact for the vast majority of people it is a much more sensible option than trying to live off their accumulated pot in isolation, since they would then have to live with the risk of running out of money before they die.

An annuity is just life insurance in reverse. People give the fact that you might die the day after taking out an annuity as a reason for not buying one, but the same people never say that you avoid life insurance at all costs because you might not die soon enough to make a profit on the deal.

[expat]

People give the fact that you might die the day after taking out an annuity as a reason for not buying one, but the same people never say that you avoid life insurance at all costs because you might not die soon enough to make a profit on the deal.

My reason for not buying an annuity is that you can get a much better return from other investments.

E.g. 100,000 at age 65, Norwich Union 367.00/month increasing by RPI. That's 4.404%

A portfolio of safe high-yield shares, or a high-dividend ETF Like iShares IUKD will return much more that that.

[IR35 Avoider]

My reason for not buying an annuity is that you can get a much better return from other investments.

An annuity is just a tax and insurance "wrapper" for a set of investments. Although most annuities are based on on an investment in government bonds, you can choose to put your money in a unit-linked annuity which invests in your choice of any one of a number of asset classes represented by different insurance company funds. Funds that invest in shares or commercial property should be among the options. I expect that it is only a matter of time before the annuity equivalent of a SIPP appears, where you will have complete control over the exact securities your annuity is invested in.

The main reason unit-linked annuities are a fringe product and no-one (as far as I know) is offering a completely self-directed annuity is that only people with absolutely huge investment pots can afford to take the risks involved, i.e. the number of potential customers for whom these products are suitable is very small.

A pure investment in shares would be far to risky for 99.9% of us. An investment in an insurance company's property or distribution funds is probably the most aggressive investment we should contemplate.

When investing for period of less than about 30 years, it is not good enough to rely on what you expect shares to return "on average" over the long term. (30 years is roughly the time-frame in which stock-markets can be expected to revert to the mean.) You have to allow for variability, in particular for what happens if the worse-than-average years turn out to be disproportionately clustered nearer the beginning of the period. I've read lots on consequences of stock-market variability on retirement income, and it is quite frightening. My conclusion is that the only way to guarantee not running out of money in the long term is to restrict yourself to taking the natural income of the asset class, i.e. the dividends from shares or the rents from commercial property. If I were to be 100% invested in shares today, I would take an income of no more than 2.7% from the pot. Commercial property has been booming, hence yields for the sector have dropped to an all-time low of 4.8%.

This website has some interesting essays on retirement planning, including on the impact of variability. Another site I came across a long time ago addresses the same issue.

[expat]

An annuity is just a tax and insurance "wrapper" for a set of investments. Although most annuities are based on on an investment in government bonds, you can choose to put your money in a unit-linked annuity which invests in your choice of any one of a number of asset classes represented by different insurance company funds. Funds that invest in shares or commercial property should be among the options.

Really? Just a wrapper? Only for what is offered, only at the companies' prices. Can you point me at an annuity that invests in the asset class that I am tempted to base ISA investments on?

1. invests in UK shares of companies with
- large market capitalisation
- above-average dividends with a consistent history of good (preferably increasing) yields
- good dividend cover (i.e. earnings > dividend so ithey are reinvesting profit, not just paying out capital to stay afloat)
- low debt
2. has management costs of < 1% p.a. and prefereably < 1/"%
3. has no front-loading

Yes of course I can find an annuity that invests in shares. The point is to find one that invests in a way that I am happy with (after the last 10 years, puh-lease don't tell me to shut up and trust the professionals!) and does not cost too much to run.


As for the "natural return of an asset class", I quite agree. For conservatively-invested value-oriented shares I believe that is much higher than 2.7%. I am familiar with retirement planning, efficient-frontier, impact of variability, safe withdrawal rate studies, etc. I have no intention of basing my withdrawal on a supposed ability to withdraw some "avergae" return consistently. I do study Monte Carlo-based predictions of safety-likelihood over projected withdrawal periods.

None of that is the point. The point is that annuites are inflexible and expensive. No wonder the compulsory annuities market is more than 10 times the voluntary annuities market!