When writing an editorial, I am always struck by the need to say something profound, but I have to say that in an economic climate such as we are currently experiencing I feel as though it has all been said already.

So where are we in November 2009? Are we through the worst, or is the worst yet to come? I have to say I don't know – "that's reassuring", I hear you say.

But prudence today and positioning your business to take advantage of opportunities that may arise is, I suspect, where you and every other company would like to be in 12 months' time.

So what does this signify in an employee benefit context? Well, we think it means providing employees with a comprehensive range of benefits, delivered efficiently with the appropriate level of advice, at a predetermined and competitive price.

In this way, you will retain your valued staff, attract new ones (when you need to) and, importantly, retain control of at least this part of your 'profit and loss' account.

I hope you find the contents of this newsletter helpful in achieving these, or similar, objectives.

Peter Maher
Head of Financial Services, London


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.


Do you have the necessary protection in place to safeguard your business?

Running your own business may leave you little time to consider your financial future, but what would you do if a critical illness, such as heart attack or stroke, forced you to be absent from work?

Recent research conducted by Legal & General across 1,000 members of the British Chamber of Commerce has revealed a significant gap in business protection (the survey highlights are shown in the box below).

Failing to address what would happen on the death or critical illness of a business owner, or key person, could have significant financial consequences for the business and remaining shareholders. Ultimately, it could even result in the failure of the business.

To establish whether you have the necessary business protection policies in place, consider the following points. If you have not already addressed these issues, or recently reassessed your arrangements, we recommend a full review.

  • Could your business continue to exist if you die or are absent for a long period?
  • Would you and your family be left with enough to meet day-to-day expenses to maintain your lifestyle?
  • What do you want to happen to your shares in the event of your death or inability to continue working?
  • Do you need to put any formal agreements in place to meet your requirements?
  • Do you need any protection policies to ensure that there are funds available to achieve what you want?
  • What about the people who keep your business running and are key to its success? Do you have an employee whose death or continued absence might seriously impact on the profits of your business?

Next Steps

If you have not already reviewed your arrangements, Smith & Williamson can help. We provide advice on the financial consequences of the death or serious illness of shareholders and key persons, and we can also assist with putting the necessary protection policies in place in a cost-effective and tax-efficient way.

Legal & General's Survey Results

Corporate Debt

Of the businesses surveyed, 50% had corporate debt, but less than half of these had any life or critical illness policies to cover the money owed.

Shareholder Protection

When asked about shareholder protection to provide funds to buy-out shares in the event of the death or critical illness of a shareholder, less than half had any formal agreement to establish what should happen. Only 4% had any shareholder protection to provide funds to help buy the shares.

Keyman Protection

Less than half of the companies had put in place any protection to address the financial consequences of the death or critical illness of a key person.


A growing number of organisational pension schemes are employing professional/ independent trustees.

The life of a lay trustee is not an easy one, particularly if he/she is a trustee of a defined benefits scheme. To start with, all trustees are required to have sufficient knowledge and understanding to enable them to challenge advice they receive from their professional advisers, when appropriate. This means that they must have a working knowledge of pension law, investment markets, actuarial practices and, possibly, employment law.

Add to this the discussions which take place at the time of triennial actuarial valuations of defined benefits schemes and possible conflicts of interest (employer versus trustee), and it's not hard to see why being a lay trustee can be a daunting task.

Perhaps this is why a growing number* of schemes are appointing independent or professional trustees to work alongside, and with, the lay board of trustees.

No matter the size of the scheme, trustees, and particularly those of defined benefits schemes, will have issues to address and manage. Appointing an independent/ professional trustee would, in many cases, ease the burden and make the life of the lay trustee a lot easier.

How We Can Help

Smith & Williamson acts as professional trustee to a variety of trust arrangements. We act as professional trustee to over 200 small self-administered pension schemes and provide trusteeship and administration services for established employee benefit trusts and share save schemes. Through our private banking service we can provide full trustee bank account services.


Providing employees with a salary sacrifice scheme will save them and the business money.

'Just getting by' is becoming more and more difficult. Employers are trying to reduce their costs and employees' take-home pay is being squeezed. At the same time, we are constantly reminded of the need to save more for our retirement. For employers and members of their pension scheme, a salary sacrifice scheme provides a neat solution.

Where members are required to pay a contribution into their employer pension scheme, a salary sacrifice scheme can reduce the employer's NI cost, increase the member's take-home pay, and increase contributions to the member's pension scheme.

How Does It Work?

If a member currently pays a contribution of 5%, he/she takes a 5% salary reduction and stops paying the personal contribution. The 5% salary reduction is paid as an employer contribution to the pension scheme.

The member's take-home pay increases by the saving in employee NI on the lower salary (11% on earnings up to £43,888, 1% thereafter).

The employer's costs are reduced by the NI saving (12.8%) on the salary reduction.

Pension contributions are increased by the employer adding some of his/her national insurance saving to the 5% employer pension contribution.

A further benefit is that higher rate taxpayers effectively obtain higher rate tax relief on pension contributions at source, rather than having to claim additional higher rate relief on personal contributions through their end of year tax return.

The scheme must be well documented, and there are HM Revenue & Customs requirements to be observed. It needs to be flexible enough to cater for changes to individual employee circumstances. Employers will also need to consider how the scheme is communicated to staff.

An Illustration

Consider an employee earning £25,000 who wishes to pay 5% per annum, or £1,250 per annum gross, into a pension plan. The company contribution is also 5% per annum or £1,250 per annum. The table illustrates the various savings and increases afforded by the scheme.


Without Salary Sacrifice

With Salary Sacrifice




Personal Allowance



Taxable income



Tax payable






Net salary (gross earnings less tax and NI)



Deduct employee pension contribution (net)



Net disposable Income



Net Effect To The Employer







Employer pension contribution






Saving in employer costs



Net Effect To The Individual

Effective pension contribution



Increase in spendable income



Increase in pension contribution



A Note Of Caution For Members

A salary sacrifice is a permanent reduction in your salary and you do not have the right to revert to your previous salary unless there are special circumstances. Your previous gross salary will be used as the yardstick for things such as annual salary increases or salary-related benefits.

Making a salary sacrifice could affect entitlement to state benefits, such as the state second pension and tax credits. It may also affect contribution based benefits, such as incapacity benefit and job seekers allowance, and mortgage arrangements as you are reducing your annual salary.

At Smith & Williamson, we have been advising many of our corporate clients that operate contributory pension schemes about the merits of a salary sacrifice scheme and how it can be introduced. We offer a no obligation, free of charge, feasibility report, which should identify cost savings that can be achieved.


By investing in commercial property, pension schemes and their sponsoring employers might be able to benefit from the downturn.

Given the decline in bank interest rates brought about by the economic downturn, many trustees have been looking for new investment vehicles in which to place large cash deposits.

As we all know, the recession has also led to a decline in commercial property valuations, but you might not know that this brings about a unique opportunity for pension scheme trustees and finance directors.

In certain cases, a pension scheme's trustees could use the scheme's assets to fund the purchase of the property of the sponsoring employer. This then releases the liquidity within the pension scheme to the company – at a time when such liquidity within the company would be highly desirable.

The pension scheme receives rental income, any capital growth and, in the longer term, any sale proceeds free of inheritance tax, CGT and income tax. The company would also benefit from a corporation tax offset on the rental income it pays to the trustees.

As 2011 approaches and capital allowances on agricultural and industrial commercial property look set to be phased out, this may be an opportune moment for trustees to review their cash balances and look at moving funds into commercial property.

Certain schemes are also able to make capital loans to the sponsoring employer of up to 50% of the asset value of the scheme. The interest rate of these loans is an attractive 1% above base rate. However, the business must use these funds for genuine business purposes (not simply to aid cashflow).


Where do you turn when your relationship with an employee breaks down?

The Smith & Williamson Forensic Services team deals with employee investigations (investigating employee behaviour and activities) in a proportionate and cost-effective manner.

Our team is made up of experienced investigators who understand the issues involved and can recover, analyse and interpret information, from both paper based files and data stored on electronic systems, providing a case-relevant analysis.

Our experience covers areas such as:

  • fraud
  • director misfeasance
  • misappropriation of funds
  • internet misuse and email analysis
  • fraudulent expense claims
  • document analysis and metadata interpretation
  • intellectual property theft
  • breach of covenant
  • competitor data exchange.

The team is comprised of professional investigators with experience in interviewing in accordance with the Police and Criminal Evidence Act, and forensic computer practitioners with the ability to recover and interpret complex digital evidence. Together, we offer a complete solution when faced with employee investigations, ensuring that the process is as simple and as efficient as possible for the employer.


*The Mercer Trustee Board Structure, Performance and Remuneration survey of 2008 questioned the trustees of 158 organisational pension schemes of various sizes. 44% reported that an independent/professional trustee had been appointed to the board. The 2007 figure was 35%.

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.