Many directors nearing retirement paid a high price when markets plunged a year ago. But taking a more active role in pension planning may have protected their wealth
When it comes to retirement planning, Mike Davies, chairman of a £20m-turnover logistics support company, is sitting pretty. Twenty years ago, Davies, 58, placed his pension fund in a small self-administered scheme (SSAS), which is set up by a trust deed that allows members greater control over the fund's assets. Ten years ago Davies, who chairs Michael Davies & Associates, bought the former Birtwistle Mills in Blackburn with money from the fund, and converted them into warehousing and offices—some for his own companies. Rents from the property are paid back into the fund. While other directors have watched as their equity-based pension funds slumped over the past year, Davies has enjoyed generous returns.
"What I paid for the buildings I get back in rents every 16 months," he says. But he is quick to point out that such a scheme needs to be set up properly—"at arm's length"—with independent valuers deciding on the correct level of rents. The arrangement also needs the blessing of Revenue & Customs.
But the real lesson is that directors who are prepared to take an active interest in their retirement planning will score better returns with their pension when they retire than those who leave it to chance and the vagaries of increasingly capricious markets.
"I talk to a lot of directors about their pensions and they have always got this magic age of 55 when they want to retire," says Bhargaw Buddhdev, partner in the executive benefits practice at Barnett Waddingham, a firm of actuaries and financial consultants. "All of them are thinking that 55 is too early to retire now and they need to work longer. They need extra financial contributions going into their pension schemes."
The fact that directors are living longer is also changing perceptions of pensions. But longer lives have a big impact on the amount of money they need to maintain a lifestyle. "I spend a lot of time educating people on what they will get out of a pension scheme," says Buddhdev. "It's quite frightening because some realise they can't maintain their standard of living."
The problem for anyone not embedded deep in the pensions business is that the subject is just so complex. A-Day in 2006 was the biggest pensions shake-up for 60 years but added more complexity, and the changes announced in Alistair Darling's 2009 budget have piled a heap of fresh regulations on top of that. The new rules are designed to hit high earners, with tough new taxes on some pension contributions.
Regulations on what counts as income have also changed. Now directors need to include not only salary and bonuses but also dividends from shares, rents from property or even interest on building society accounts in the bottom-line figure taken into account for tax purposes.
The rules are so onerous for directors earning above £150,000 a year that Buddhdev is advising his clients to drop contributions to a pension scheme because there are no tax advantages. He recommends an alternative way to save called an employer-financed retirement benefit scheme (EFRBS), a way for directors to build up funds outside a normal pension.
One benefit is that there is no National Insurance charge on company or individual contributions. The company's contributions into a director's pension aren't tax-deductible—but that's counter-balanced by the fact that he or she won't find himself taxed on those payments as a benefit in kind. Most directors will need an accountant to guide them through the maze of rules.
The starting point for those worried about the future is to focus on the big picture, rather than the detail of individual schemes. "To maximise the potential benefits available at retirement, directors need to have a clear contribution and investment strategy," argues Billy Mackay, sales and marketing director at AJ Bell, which provides self-administered pensions.
"Both are needed to take full advantage of their retirement funds and to ensure they make best use of the tax reliefs available. Company directors need a clear idea of what type of vehicle they are using to invest, whether it be a stakeholder or personal pension or a SIPP, and what asset classes they invest in within that vehicle."
Devoting more time to manage a pension fund is an unwelcome prospect for directors struggling to keep their company afloat. But Mike Davies shows the value of taking the trouble. He says: "I've friends with senior roles in big companies who had what they thought were good pensions and have been wiped out. I've been lucky."