Adviser > Technical Central > Pre simplification > Occupational > Maximum Funding For Insured Money Purchase Schemes And SSAS Explained
Maximum Funding For Insured Money Purchase Schemes And SSAS Explained
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
Maximum funding methods have changed a number of times over the last decade. This analysis explains the current maximum funding bases in use for both insured money purchase arrangements and small self-administered schemes (SSASs).
What is maximum funding?
The Inland Revenue Savings, Pensions, Shares Schemes (IR SPSS) office rules set out the maximum benefits that can be paid to members of occupational pension schemes (OPSs). Maximum funding is simply a calculation used to determine the maximum level of contributions that can be paid into a pension plan on behalf of a member without producing benefits at retirement that are in excess of these maximum benefits.
The basic procedure is to:
- establish what the maximum pension might be at normal retirement date (allowing for retained benefits where appropriate and the tax regime applying to the member; either pre '87, '87-89 or post '89).
- calculate the level of contribution that is required to be paid in order to arrive at a fund at retirement which will be sufficient to provide that maximum pension.
The funding methods
The funding basis for all insured money purchase OPSs is the ABI 1996 method (as amended 31 March 1998 and 21 December 2001). The SSAS 1996 method (as amended 11 March 2003) governs all SSASs. Details of these funding methods can be found in Appendix VIII and IX of the IR SPSS OPS Practice Notes IR12 (2001) respectively.
Both the ABI 1996 method and the SSAS 1996 method use the same basic financial assumptions. These are detailed below:
| Assumption | Rate (%age) |
|---|---|
| Future salary growth | 6.9 |
| Investment return | 8.5 |
| Post retirement pension increases | 5.3 |
| Earnings cap increases | 5.3 |
| Contribution increases | 6.9 |
Other points to note:
- The maximum allowable contribution must be reassessed evey 3 years (known as the triennial review). It can be expressed as either a level amount payable for each of the following 3 years or as a percentage of current salary in each year.
Note that only where the salary used in the calculations is 'final remuneration' as described in Appendix I of the IR12 (2001) OPS practice notes can a level contribution amount be used. In particular, this means that for controlling directors, the salary used where level amounts are payable must be the average of at least 3 consecutive year's salaries.
Where the maximum contribution is expressed as a percentage of salary the current year's salary can be used for all members, including controlling directors.
A different basis for contributions, level or percentage of salary, can be used for different members of a scheme, you don't have to use the same basis for all members. Indeed, even for individual members the basis can change from one review to the other.
- Where past service is not fully funded, special contributions (commonly known as singles) can be paid.
The alternative to paying a single is to increase the level of regular contributions to fund for both past service and future service.
- Contributions for death-in-service benefits may be paid in addition to maximum pension contributions.
- Funding for a post-retirement spouse’s pension is only required if the member is married (excludes a divorced member unless the member has remarried) at the date of the maximum funding calculation or if there is a nominated financial dependant. This includes unmarried partners provided they are financially dependent.
The spouse's date of birth should be used where known. If not known, assume 3 years younger or older for female and male spouses respectively.
- If a member’s salary increases or decreases between triennial reviews and the maximum contribution is expressed as a percentage of salary this percentage should be applied to the new salary.
If a level amount has been used this can be maintained until the next review date.
Where the salary increase results in a contribution above the maximum level recommended at the last review, a new review may be completed before the 3 years have expired.
- If less than the maximum contribution is paid in one year, the shortfall cannot be made up in the following year if this would mean that a contribution greater than that permitted at the last review would be payable.
- There is no requirement to carry out a maximum funding check for ‘policy only’ investments. The funding check is the responsibility of the main scheme.
What is the 'de minimis limit?
Basically, the 'de minimis' rule means that no funding check is required where total contributions to all schemes do not exceed 17.5% of remuneration. For post '89 members, remuneration is restricted to the earnings cap.
Contributions payable to provide for death-in- service benefits and those payable using the 'concurrency' rules can be excluded.
The information provided is based on our interpretation of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Independent advice must be obtained regarding the effect on a specific scheme.
Published 06 April 2004
For professional advisers only
