Of the eight existing pension formats, there are two which offer particularly
flexible options for the directors of private companies. These are the small
self-administered scheme (“SSAS”) and the self-invested personal pension
(“SIPP”). The two types of pension differ in matters of fine detail (for
example the types of investment the pension trustees are allowed to make),
but the principal difference lies in how the government controls them.
The government offers valuable tax exemptions to pension schemes, and in
return exerts a degree of control over how the pension schemes are operated.
Up to now, the control has been broadly through one of two routes – the
government restricts either how much can be put into a pension fund (“defined
contribution”) or how much can be taken out (“defined benefit”).
Of the two schemes currently available, the SSAS is a “defined benefit”
scheme – the pension fund exists in order to provide benefits linked to the
director’s final salary, and the amount of contributions that can be made into
the scheme is simply whatever is required to secure those benefits. This type
of scheme is vulnerable to poor investment performance, since the employer may
be required to inject fresh funds to make up shortfalls at a time not of his
own choosing.
By contrast, the SIPP is a “defined contribution” scheme – the legislation
specifies a maximum level of funding in any year, and the employer and
director can choose to contribute up to that level; the eventual benefits
will depend on the amount funded and how it performs. Such schemes are
also vulnerable to poor investment performance, in that the final benefits
may be lower than hoped for. Nonetheless, the employer can never be called
upon to make unanticipated contributions. |
