Unlimited Pension Contributions?

[Churchill]

Could be scary, that is the point that I was trying to make.

Alan

Talking about scary, Solomon Williams isn't one of the partners in your company is he?

[Nixon Williams]

Talking about scary, Solomon Williams isn't one of the partners in your company is he?

No, he is not!

Alan Williams

[IR35 Avoider]

Like I say I don't have the figures at hand, it was 6 months ago and done and dusted now, Prudential were the best at the time.

I know who to come to for future penison advice !

Are you personally paying large contributions in a low salary setup ?

Do you know how the umbrella Co's have dealt with this ? I quized Parasol a while ago but didn't find anybody who really understood what I was asking, they just quoted the standard annual limit.

I'm currently paying salary of personal allowance (£420 a month) and everything else I need to spend to defray all IR35 liability goes into a pension. I only work part time, so "everything else" will probably amount to 30-40K. I am also paying myself dividends of about 30K for a couple of years to get retained earnings from the late nineties out of the company.

When I enquired with umbrella companies early this year, none of them were willing to be co-operative about really large contributions, because of the HMRC FUD documented elsewhere in this thread, and none would pay contributions to my choice of provider. I suppose they may bend on the first point once the revised HMRC guidance becomes official, but I've now decided that the second point alone is a good enough reason to continue running my own company. The flat rate VAT refunds pay a good slice of the accountants fees, so it's also probably actually cheaper than using an umbrella.

[IR35 Avoider]

OK, here's my proposal for a mutual insurance company to sell competitively priced annuities to the likes of us.

Everyone who joins has their lump sum transferred into their own account with an on-line stock-broker, where they can manage their money however they like.

Each month-end they are allowed to withdraw at most [account balance]/[current statistical life expectancy in months] from their account. (The transfer out of their stock-broker account goes to the insurance company who deduct tax and forward the balance.) The figure produced by the calculation is called their "withdrawal limit."

Whenever a customer falls off his perch, the insurance company closes out his account at the stock-broker and distributes the cash among the other customers. Each customers share is weighted according to their "withdrawal limit". Since this figure already incorporates how much capital they are potentially contributing to the global pot and their current risk of contributing (current risk of death measured by current life expectancy) I think (without having pondered for very long to work out if I'm right) that weighting by "withdrawal limit" gives a fair result.

The admin costs of the insurance company are funded by a levy on withdrawals.

What do you think?

(I realise I'm arguing with myself now.)

OK, some work with spreadsheets has convinced me that the above plan doesn't work - capital will run out if people live long enough, and no simple modification solves the problem. Also the weighting factor for the mortality bonus is not quite right.

Alternative proposal.

Individuals have their share of mortality bonuses from people who've died during the month weighted by [capital]*[probability of their own death occurring during that month].

Each month they are allowed withdraw an amount equivalent to the interest their capital would have earned if it was all on deposit for a month, plus their share of all mortality bonuses divided up during that month.

In other words, they are never allowed to spend their capital, so can't run out of money. This does mean they are guaranteed to "lose" 100% of their capital to the shared pot when they die, but the quid pro quo is that they will gain amounts from people who die before them that (in a probabilistic sense) fully compensates them for this.

They still get the full benefit from successful investing in shares or whatever, as both their monthly "interest" payments and the size of their shares in mortality bonuses are directly proportional to their capital.

[tim123]

In other words, they are never allowed to spend their capital, so can't run out of money. This does mean they are guaranteed to "lose" 100% of their capital to the shared pot when they die, but the quid pro quo is that they will gain amounts from people who die before them that (in a probabilistic sense) fully compensates them for this.

They still get the full benefit from successful investing in shares or whatever, as both their monthly "interest" payments and the size of their shares in mortality bonuses are directly proportional to their capital.

This only works when the scheme is mature. It relies upon everyone having the same chance of gaining money from those who die.

But the early adopters are going to take a bath. There is not going to be anyone dying during the first years (possibly all of them) of drawing their pension.

So their pot is not going to grow, they are not going to get the 'compensation' for not being able to draw their capital, so they are not going to invest.

tim

[dude69]

slightly OT, but my company as yet does not pay me a pension, but it (i.e. me) has decided it now will. Is there any reason not to pay a lump sump in towards the end of the company's Corporation Tax year? Would it be problematic to do it like this?

[rootsnall]

slightly OT, but my company as yet does not pay me a pension, but it (i.e. me) has decided it now will. Is there any reason not to pay a lump sump in towards the end of the company's Corporation Tax year? Would it be problematic to do it like this?

One lump sum is fine at any time during the year. How much that lump sum can be is what is under debate.

Have you opened the pension yet, I just opened a SIPP with www.sippdeal.co.uk and that was pretty easy to do and I think the cheapest option. If you don't want to make any investment decisions yourself I was previously paying into a Standard Life stakeholder with 0.7% cap on fees. Be careful you don't get taken to the cleaners on setup or annual fees. www.fool.co.uk has lots of info on its forums.

[IR35 Avoider]

This only works when the scheme is mature. It relies upon everyone having the same chance of gaining money from those who die.

But the early adopters are going to take a bath. There is not going to be anyone dying during the first years (possibly all of them) of drawing their pension.

So their pot is not going to grow, they are not going to get the 'compensation' for not being able to draw their capital, so they are not going to invest.

tim

I know - but here are a couple of potential solutions.
1. Reinsurance.
2. Accounting - the refinement describe below. (Note that mortality bonuses are now added to capital rather than income.)

In addition to the brokerage account, each customer has a "mortality account" with the insurance company. (Need to think of a less depressing name, obviously.) Each day their mortality account is credited with an amount equal to [their capital balance]x[probability they died that day]. This is the customers fair payment for the risk they took of surrendering their capital by dying that day. (The credit is notional, there's no actual money yet.) Notional interest at BOE base rate is added to account balances. When a customer dies their capital is distributed among other customers pots on a pro rata basis based on the level of customers mortality accounts. Each customers mortality account is then debited with the amount their brokerage account actually recieves. Mortality accounts can be overdrawn, if there's a spate of deaths, in which case interest is charged rather than paid. Over the long term, the insurance company adjusts mortality tables to ensures that mortality account balances stay near zero.

In other words, people will see daily amounts being added to their account telling them what they are owed, with actual payment delayed until some customers die.

What they see themselves getting is in the short term no longer directly related to other customer deaths - the mortality accounts and the companies mortality tables create a smoothing mechanism.

With regard to withdrawal limits, I've had a slight re-think. I think rules similary to income drawdown could be implemented, allowing customers to withdraw somewhere between (say) 3% and 6% (maybe more?) per year at their own discretion. They could therefore draw slightly more than they otherwise would from their brokerage pot while they're waiting for what they're owed from their mortality account. (Or to put it another way, the balance of the mortality account can be added to the brokerage balance before applying the withdrawal percentage.)

[IR35 Avoider]

I was about to post my fourth revision of how my mutual insurance company should work (having skipped posting the details of the third) however I think my work is all redundant.

At least one commercial company is already offering what I want, so I think it's fair to expect that in 33 years time when I'm actually ready to buy the product, there will be a number of providers competing with each other, so charges will be acceptable. (For all I know there may be other providers with lower charges now, I haven't really researched properly yet.)

Anyway, Merchant Investor's Growth Annuity Portfolio is a unit-linked annuity with a self-invested option that allows you to completely manage your own pot, choosing any securities listed on the stock exchange, any gilt, any Unit Trusts/OEICs or any Investment trusts.

If I've understood correctly, the charges for this option are £420 per year plus 0.75% of your pot. Anything you choose to pay to fund managers within your pot will be on top of this.

Incidentally, their brochure contains the first proper explanation I've come across of how unit-linked annuities work, something I had only begun to work out for myself as a result of my fourth attempt at reinventing the wheel.

[Freelancer Financials]

Contractor Pension Contributions - Update

We still get asked this question daily.

There are no longer any limits to contributions you can make from your limited company income into pension funds; the amounts must simply not be very much larger than your actual declared corporate income.

HMRC have accepted that employer contributions by Contractor's one-man limited companies should be universally eligible for tax relief. This means that, unless you are planning on contributing very large amounts which are totally out of character with your business you can be safe in the knowledge that your contributions will not be questioned by HMRC.

There is a general overriding rule that a companies expenses must be incurred “wholly and exclusively” for the benefit of the trade and there was until recently significant uncertainty as to how large employer contributions could be for this condition to be met. Recent guidance from HM Revenue & Customs, BIM446001 confirms that except for very limited circumstances, the payment of a pension contribution will be treated as part of the normal cost of employment and therefore will satisfy the “wholly and exclusively” requirement.

This guidance is excellent news for one-man limited contractors and it should now be acceptable for a company to make employer contribution to a contractor’s pension, up to the level of profits made by the company.

In most cases the level of contribution that can be made and that will benefit from tax relief will exceed the amount that a contractor is likely to wish to contribute on an annual basis in any given year.

HM Revenue & Customs guidance indicated that particular care will need to be taken with employer contributions to connected people i.e. the contractors spouse, here the level of contribution should be limited to the level of contribution that would be paid to an unconnected employee. It was also thought to be problematic if contributions where paid by a party other than the former employer, after a trade is sold or otherwise ceased.

John Yerou
Freelancer Financials