Does this pension product exist?

[anonymous-user]

Just wondering about pension products, and I was wondering if this existed....

As we know, pension contributions are capped at £40k per year with a lifetime allowance just over £1m.

Let's use an example of a person who normally makes contributions via their own company and so might normally use either SIPP or SSAS wrapper.

As I understand it, the government calculates "final salary" schemes on the basis of 20 times the defined benefit, even though the actual value of the benefit might be 30-40 times.

So why isn't there a financial product for company owners where they create their own "final salary" scheme. Would seem to be a good way of legally exceeding both the normal annual contribution limits and lifetime allowance limits.

The costs would be higher than for a simple SIPP, as you would need the scheme's liabilities to be calculated so the "trustees" could advise the sponsoring company what contributions were required to meet the scheme's commitments.

I realise this would only be applicable in a relatively small number of people, but wondered if there was a good reason this doesn't exist?

[Stay in Bed Instead]

Defined benefit SSAS's do exist.

[otherman]

Well it would work, but when people found out how much final salary schemes actually cost, which is two arms and half a leg, they wouldn't want to pay for it.

[wisbech]

Some issues - who defines the final salary? What if the fund is based on an expected final salary of X, but in fact it is Y, and therefore doesn't have enough to pay it. Or what happens if the investment returns are lower than expected, again so there aren't enough funds.

It is one thing to say "give me X pounds a year now, I will invest it for you, and in 20 years time the pot will be your pension" There are no unknowns for the provider

It is very different to say "OK, in 20 years time I will pay you 60% of whatever your final salary will be for the rest of your life, and then half of that to any surviving spouse. So I need to charge you Y" What the provider needs to guess

- your final salary
- how long you and your spouse will live
- what investment returns they will get for the next 20 years, plus the pension period (which is of unknown duration)

Edited by wisbech on Tuesday 8th September 03:09

Edited by wisbech on Tuesday 8th September 03:10

[anonymous-user]

Stay in Bed Instead said:

Defined benefit SSAS's do exist.

Do they? That's interesting.

ETA : Yes, it seems you are right. Here they are being marketed as the "best kept secret". Interesting this gets so little attention. (partially I suppose because it suits a relatively small number of people).

https://embarkgroup.co.uk/insights/db-ssas-your-be...

Edited by anonymous-user on Tuesday 8th September 06:06

[anonymous-user]

wisbech said:

Some issues - who defines the final salary? What if the fund is based on an expected final salary of X, but in fact it is Y, and therefore doesn't have enough to pay it. Or what happens if the investment returns are lower than expected, again so there aren't enough funds.

It is one thing to say "give me X pounds a year now, I will invest it for you, and in 20 years time the pot will be your pension" There are no unknowns for the provider

It is very different to say "OK, in 20 years time I will pay you 60% of whatever your final salary will be for the rest of your life, and then half of that to any surviving spouse. So I need to charge you Y" What the provider needs to guess

- your final salary
- how long you and your spouse will live
- what investment returns they will get for the next 20 years, plus the pension period (which is of unknown duration)

Those would be important questions. And I understand that the answers is what sunk defined benefit pensions originally.

The difference in my original 'product' question is that I'm talking about a structure like with a SSAS i.e. the trustees in main control are actually the beneficiaries and are also the owners of the company liable for the contributions.

So in many ways it would be possible to adjust the answers based on what was actually affordable. After all, the answers to these questions are also important in a defined contribution scheme, and yet the answers are also completely unknown.

I suppose what I am wondering is that the government seem to have left a loophole open in the rules as they convert defined benefits into a contribution figure based on this factor of 20, which seems far too low.

[Stay in Bed Instead]

It's a very high risk high cost method of pension provision that few employers are willing to take, even if the only member owns the employer. They are potentially on the hook to fund the pension scheme for the lifetime of the member and their spouse.

[anonymous-user]

Stay in Bed Instead said:

It's a very high risk high cost method of pension provision that few employers are willing to take, even if the only member owns the employer. They are potentially on the hook to fund the pension scheme for the lifetime of the member and their spouse.

Interesting points. Thanks.

[Countdown]

wisbech said:

Some issues - who defines the final salary? What if the fund is based on an expected final salary of X, but in fact it is Y, and therefore doesn't have enough to pay it. Or what happens if the investment returns are lower than expected, again so there aren't enough funds.

It is one thing to say "give me X pounds a year now, I will invest it for you, and in 20 years time the pot will be your pension" There are no unknowns for the provider

[b]It is very different to say "OK, in 20 years time I will pay you 60% of whatever your final salary will be for the rest of your life, and then half of that to any surviving spouse. So I need to charge you Y" What the provider needs to guess

- your final salary
- how long you and your spouse will live
- what investment returns they will get for the next 20 years, plus the pension period (which is of unknown duration) [/b]

AIUI that's what the Scheme Actuary does. He/she tells the Scheme Trustees what the contribution rates need to be (for both Employer and Employee) and then they make the appropriate deductions.

The charges of administering a DB scheme tend to be pretty high so they wouldn't make sense if there were only a few members