What is an Executive Pension Plan EPP?
Published / Last Updated on 12/03/2024
There is a clue in the title if you have an executive pension plan (EPP). EPPs are investment linked (money purchase) pensions schemes that were designed for senior employees, executives and owner managers of businesses (the sponsoring employer).
There are two types of EPP:
- EPPs that solely invest in pension company investment funds.
- SSAS (small self-administered scheme) where the owner/directors/trustees of the scheme can self invest in a wider range of direct investments such as shares or commercial property as well as normal pension company investment funds and trustee investment plans.
EPPS are technically occupational/company pension schemes that fell under HMRC Company Pension Scheme rules that are not available from 2006 under Pension Simplification rules when tax free cash moved to 25% of the pension fund value for all schemes but if you have an EPP set up before this date then you may be able to take advantage of older rules to achieve a higher tax free cash lump sum.
HMRC Company Pension Scheme Rules (in general)
Maximum pension of 2/3rds your final salary after 40 years service. E.g., a 1/60th scheme, where you get 1/60th of your salary each year as a pension e.g., 40 years service = 40/60ths i.e. 2/3rds of your salary as a pension.
Maximum tax-free lump sum of 1.5 X your salary after 40 years service. E.g., an 1/80th scheme, where you get 3n/80ths of your salary as a lump sum (n = number of years) e.g., 40 services = 3n/80ths = (3 X 40)/80ths i.e., 120/80ths = 1.5 times salary.
Many employers and owner managers wanted to offer senior staff or even themselves the ability to get a full pension of 2/3rds and a lump sum 1.5 time even if they would not be able to achieve a full 40 years service. This was allowed under tax law but changed after 1987 and 1989.
Pre-87 Rules: Member joined scheme before 17/3/87:
- There is no limit to the final remuneration used in a pension or tax-free cash calculation.
- A maximum pension of 2/3rd 's final remuneration can be paid after 10 years service.
- Uplifted 60ths based upon when you joined service and the number of years potential service to the normal retirement date (NRD)
- 5 years or less to NRD = 1/60th only for each year to NRD.
- 6 years to NRD = 8/60ths maximum.
- 7 years to NRD = 16/60ths maximum.
- 8 years to NRD = 24/60ths maximum.
- 9 years to NRD = 32/60ths maximum.
- 10 years or more to NRD = 40/60ths maximum.
- Meaning an employer could fund an EPP to deliver a 2/3rds of salary as a pension in just 10 years with no cap.
- A maximum tax-free cash lump sum of 1.5 times final remuneration can be paid after 20 years service.
- This is NOT LINKED TO PENSION INCOME meaning if you had a big enough tax free cash entitlement, you could strip out a large proportion or in many cases the whole of the pension fund as a tax free cash lump sum.
- Uplifted 80ths based upon when you joined service and the number of years potential service to the normal retirement date (NRD)
- 8 years or less to NRD = 3/80ths only tax-free lump sum for each year to NRD.
- 9 years to NRD = 30/80ths maximum tax-free lump sum.
- 10 years to NRD = 36/80ths maximum tax-free lump sum.
- 11 years to NRD = 42/80ths maximum tax-free lump sum.
- 12 years to NRD = 48/80ths maximum tax-free lump sum.
- 14 years to NRD = 54/80ths maximum tax-free lump sum.
- 14 years to NRD = 63/80ths maximum tax-free lump sum.
- 15 years to NRD = 72/80ths maximum tax-free lump sum.
- 16 years to NRD = 81/80ths maximum tax-free lump sum.
- 17 years to NRD = 90/80ths maximum tax-free lump sum.
- 18 years to NRD = 99/80ths maximum tax-free lump sum.
- 19 years to NRD = 108/80ths maximum tax-free lump sum.
- 20 years or more to NRD = 120/80ths maximum tax-free lump sum.
- Meaning an employer could fund an EPP to deliver 1.5 times of salary as a tax-free lump sum in just 20 years with no cap.
- There were special calculations required when retiring early.
87-89 Rules: Member joined an existing pension scheme between 17/3/87 and 31/5/89 OR a new scheme was set up before 14/3/89:
- There is no limit to the final remuneration used in a pension calculation only.
- A maximum pension of 2/3rd 's final remuneration can be paid after 20 years service on a 30ths basis e.g. 15 years = 15/30ths i.e., 50% of salary as pension with no cap.
- Meaning an employer could fund an EPP to deliver a 2/3rds of salary as pension in just 20 years with no cap.
- A maximum tax-free cash lump sum can be paid after 20 years service. This is up to 1.5 X Final Remuneration. The maximum salary allowed is £100,000. Therefore, the maximum tax-free cash is £150,000.
- There were special calculations required when retiring early.
Post 89 Rules: Member joined an existing pension scheme after 31/5/89 OR a new scheme was set up after 13/3/89:
- There is a limit to the final remuneration used in a calculations of THE EARNINGS CAP.
- A maximum pension of 2/3rd 's final remuneration can be paid after 20 years service.
- A maximum tax-free cash lump sum can be paid after 20 years service. This is up to 1.5 X Final Remuneration or 2.25 X the pension. Subject to the EARNINGS CAP for calculations.
- Meaning an employer could fund an EPP to deliver a 2/3rds of salary and/or 1.5X salary or 2.25 X the pension in just 20 years but now capped.
- There are no special calculations required when retiring early.
See Pre 87, 97-89 and post 89 rules Old Scheme Rules
As can be seen above, executive pensions plans were extremely popular to all the sponsoring employer to deliver high pension income and tax-free lump sums for senior employees, executives, and owner/manager directors in shorter periods.
If you have an old EPP or SSAS that dates back to 1989 or before, then it is worthwhile seeking professional advice as to whether you could benefit from older HMRC pension benefit rules and protected, higher lump sums.
