Capstone Financial Insights: What are executive pensions and should business owners offer them to directors?

By Capstone Financial

At a glance

• Consider offering a separate pension to executives.
• More flexible pensions can enhance your benefits package significantly.
• It’s an important factor when attracting the best people into your business.

Directors of expanding companies often need more flexibility than their usual corporate pension scheme offers. All companies need to auto-enrol employees into a pension. However, standard auto-enrolment schemes tend to put members into a default fund and have restrictive rules around what contributions, investments, benefits and retirement options you can provide.

Executive pension plan benefits

Offering a separate pension to your executives allows them more flexibility and tailoring in areas such as investment choices and how they take benefits.

Andrew Williamson, Director / Chartered Financial Planner at Capstone Financial, says that even if the executives in your company have not requested a separate pension, you should consider offering it as part of your recruitment and retention strategy. More flexible pensions can enhance your benefits package significantly, so will likely be an important factor in attracting the best in the field.

“Separate pensions don’t have to be for executives only,” he adds. “You could offer them to any staff, or when they reach a certain grade. This would boost your attractiveness to a wider range of recruits.”

Another reason for offering a separate scheme is that the executives may have several old schemes they want to consolidate into one more flexible structure but it doesn’t always make sense to do this in a basic auto-enrolment scheme. They may also wish to contribute to the pension from other income sources, such as a rental property, which a standard scheme may not allow. A more bespoke option can bring easier administration and oversight of all their investments and it allows them to keep details about other contributions private.

Andrew says advice in this area is key. Moving pensions, especially older occupational schemes can risk losing great historical benefits that are not available in more current structures.

What are the pension choices for executives?

There are several options for providing executives with more flexible pensions.

As an alternative to your standard scheme, you could offer directors a personal pension, a self-invested personal pension (SIPP), or a small self-administered scheme (SSAS). These all have different options that senior employees may find beneficial, and don’t worry about the ‘personal’ tag, they can all accept employer contributions.

Andrew says that the first and most common choice would be a personal pension, as it gives a wider range of investments and benefit choices than a standard auto-enrolment scheme but is still simple and low cost.

SIPPs have slightly higher fees but enable you to include more esoteric investments, such as shares in unlisted companies and commercial premises, which can be a highly attractive benefit. However, they are generally only suitable for those who are fairly experienced at actively managing their investments.

A SSAS can provide executives with the extremely useful option to loan funds back to the sponsoring employer. However, you should get financial advice on all these decisions and choosing an SSAS will require specialist advice.

Administrative challenges

You could allow executives to pay contributions to a separate scheme of their choice. Moreover, having multiple executive schemes with different providers is not advisable, as this can be cumbersome administratively. Besides, it’s usually best practice to offer the same benefits across the same grade of employee, including at director level. It’s better if you, as the employer, pick one provider for all executive schemes.

What are the pension allowances, and how do they affect executive schemes?

Allowances are the same for all Defined Contribution schemes, no matter the structure or type of member in them. In April 2024 the Lifetime Allowance that determined how much money you could save into a pension over your lifetime was removed meaning there is no limit on the amount people can build up in pension scheme and still receive tax relief. There are still limits on the amount of tax free cash you can build up as well as tax free lump sums on death and these need to be considered when deciding on funding levels.

The amount you can pay in annually, the annual allowance, is still in force and the standard allowance is currently £60,000. But for employees with high earnings, there can be additional tax-planning factors to consider. So, advice is important to ensure greater pension options or contributions do not cause additional tax charges.

“Providing access to high-quality advice on allowances and options will ensure your generosity isn’t wasted in tax charges,” says Andrew. “It’s important to get early advice and ensure you understand your plans’ implications.

“This advice needs to be specific to individuals rather than generic, because it will factor in all pension schemes and the executives’ plans. The executives will also likely find this support useful for their own planning.”

How we can help

We can support you in implementing schemes for individuals to ensure they have the right solution for them. We can offer personalised advice for the executives in the new scheme and also help implement and review any schemes you provide for your wider workforce. If this is of interest to you, do not hesitate to get in touch.

Ongoing advice will include planning around annual allowances, and investment support. Growing companies face many challenges in these uncertain times, and having a safe pair of helping hands can be priceless.

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Photo credit: Capstone Financial