UK: EFRBS: Keep Them Focused - Are You Offering Your Executives An Attractive Pension Package?

Last Updated: 2 December 2009
Article by Peter Maher

With the new 50% income tax rate and restrictions on tax relief for pension contributions, unregistered pensions schemes are gaining popularity.

Unapproved retirement benefit schemes (unregistered pension schemes) gained greater popularity following the introduction of the annual and lifetime caps for approved pension schemes (renamed registered pension schemes) at A-Day (6 April 2006). Their appeal has been further enhanced with the Finance Act 2009 introducing the 50% tax rate for higher rate tax payers and the restrictions on tax relief for pension contributions to registered schemes.

Given the economic climate and these new regulations, key employees may be concentrating less on your business and more on their future loss in income. Therefore, employers need to ensure they are offering their executives the best possible pension and reward packages.

An employer-financed retirement benefit scheme (EFRBS) is an unregistered pension scheme that can be used to provide retirement benefits to employees and former employees, and should present an attractive option for qualifying employers.

What Are The Benefits?

An EFRBS is free to invest in any class of asset, and provides a wider range of benefits than registered schemes. It is not subject to the annual and lifetime allowance limits that apply to contributions to registered pension schemes.

An EFRBS that is genuinely established to provide retirement benefits for employees may also give rise to tax planning opportunities. These include National Insurance (NI) contributions savings and a more beneficial post-tax position for a 50% tax-rated employee, when compared to payments above £20,000 into a registered pension scheme.

The benefits apply to both UK and non-UK domiciled individuals. Non-UK domiciliaries seeking to mitigate the impact of the £30,000 remittance basis charge will find these benefits particularly attractive.

Running An EFRBS

An EFRBS can be set up onshore or offshore, but is likely to be more favourable established offshore as non-UK sourced income and gains can then roll-up tax free.

The scheme can pay a pension or cash at retirement. Furthermore, the retirement age may be lower than the minimum age of 55 years that applies to a registered pension scheme, from 6 April 2010.

The employer will not be entitled to a corporation tax deduction until qualifying benefits are paid out of the EFRBS. Qualifying benefits constitute the payment of money or transfer of assets otherwise than by way of a loan, and include pensions, annuities, lump sums or other similar payments. There is no requirement for these payments to be subject to income tax on distribution in order for the employer to obtain a corporation tax deduction.

Additionally, there is no employee tax or NI liability on the employee in respect of employer contributions to the scheme, nor are the majority of payments of qualifying benefits out of the scheme subject to NI contributions. The payment of an annuity/ pension will be taxable as pension income.

There is no inheritance tax on the creation of an EFRBS or on the death of a member.

Where the trustee is located offshore, there should be no UK capital gains tax (CGT) liability on any gains realised on capital assets held within the scheme.

Foreign income gains realised within an offshore EFRBS will be free from UK taxation. This is also the case for UK residents and non-UK domiciled employees, irrespective of whether they have paid the £30,000 charge per annum to use the remittance basis.

With EFRBSs gaining popularity, there are a growing number available in the market. However, it is essential that you seek appropriate legal and consultancy advice from the outset, in order to avoid falling foul of the complexities that lie within such schemes.

Who Should Consider An EFRBS?

  • Companies wanting to provide retirement benefits to employees with the added benefit of non-aggressive tax planning.
  • Owner-managers of close companies.
  • Companies not concerned by the deferral of the corporate tax deduction for pension contributions.
  • Employers with contractual obligations to make payments to employee pension schemes.
  • Employers who pay large discretionary bonuses.

An EFRBS is suitable for employees with any of the following criteria.

  • Income in excess of £170,000.
  • Close to retirement age.
  • Enjoying large discretionary bonuses and do not need immediate access to the funds.
  • Already at, or approaching, the lifetime allowance cap for registered pension schemes.
  • Non-UK domiciled.
  • Considering retiring abroad.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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