Employer Funded Retirement Benefit Schemes (EFRBS)

BACKGROUND

Employer Funded Retirement Benefit Schemes (EFRBS) are essentially an alternative to a UK registered pension scheme.

The regulation of UK pensions underwent a major overhaul which took effect from 6th April 2006 “A Day”. The aim of the overhaul was to simplify the regulation of pensions and make pensions a more attractive investment opportunity.

From 6th April 2006, the distinction between approved and unapproved pension schemes was replaced with “registered” and "unregistered” schemes.

Although post A Day it was felt that the appeal for unregistered pension funds would be lost, subsequent amendments to registered pension rules have resulted in unregistered schemes remaining attractive. This is due to the considerable restrictions in how much can be invested in a registered pension scheme tax efficiently and the assets in which these schemes can invest.

An EFRBS is an unregistered pension scheme that offers a solution for the higher paid, being more flexible than registered pension schemes and permitting higher benefit levels.

With the introduction of the 50% income tax rate in April 2010, offshore EFRBS can provide tax efficient planning opportunities to defer UK tax.

COMMERCIAL PURPOSE

The underlying commercial purpose of establishing an EFRBS is for a Company to secure a competitive advantage in its business environment.

A quality workforce will empower a company to success. An EFRBS can greatly enhance an employer’s aims and objectives by providing a framework to attract, reward and motivate quality employees.

Equally important is the careful consideration of the requirements of key shareholder/directors who are the risk takers and strategic thinkers in any business. Such individuals should be catered for on an appropriate basis and the utilisation of an EFRBS will allow a company to maximise the rewards for their efforts.

LEGAL FRAMEWORK

Typically an EFRBS is established as an employer sponsored trust for the purpose of providing retirement benefits to the sponsoring Company’s employees.

The sponsoring Company makes voluntary contributions to the EFRBS. These contributions will be capable of benefiting all employees including former employees.

A trust is constituted by the person known as the Settlor (in this instance the sponsoring Company) transferring specific assets to the Trustees and declaring there to be held in Trust.

A trust has the following characteristics:

• The assets constitute a separate fund and are not part of the Trustees’ own property;

• Title of the Trust assets stands in the name of the Trustees; and

• The Trustees have the power and the duty (in respect of which they are accountable) to manage, employ or dispose of the trust assets in accordance with the terms of the trust

ONSHORE V OFFSHORE

An EFRBS can be resident onshore or offshore. Offshore EFRBS offer tax advantaged investment growth as they are only subject to UK income tax or CGT on UK sourced income or gains. Therefore the fund is able to accumulate tax free.

The taxation of benefits including lump sums received by employees will depend upon the scheme member’s tax residency at the time benefits are taken.

Regardless of trustees residency benefits received by a UK tax resident scheme member are assessable to income tax as employment income. However the funding of an EFRBS should not be taxable as employment income of employees, nor subject to National Insurance contributions.

KEY BENEFITS

The primary benefit and function of an EFRBS is pension planning. As an unregistered pension the fund is not included in an individual’s pension lifetime limit allowance. There is also no specific retirement age and no requirement to buy an annuity.

In addition, due to their flexibility of investment choice and tax treatment, offshore EFRBS provide a number of other tax planning opportunities and uses. This can be summarised as follows:

• Tax efficient profit extraction from a UK resident company;

• Tax efficient holding structure for assets used by a UK company, for example commercial premises or intellectual property; and

• Residential property investment.

HOW IFG CAN HELP

IFG International has significant experience in the administration of a wide range of complex trusts, companies and partnerships, and with an excellent network of lawyers and accountants is ideally placed to establish and administer international pension arrangements whilst at the same time drawing on any expertise or advice where required.

Our services include:

• Consulting and advising on the overall structure from a Jersey perspective;

• Providing introductions to necessary advisers;

• Provision of Corporate Trustees services;

• Provision of Trust administration services;

• Obtaining Jersey tax clearance;

• Notifying Jersey tax authorities of the establishment of the arrangement;

• The provision of all ongoing financial accounting/reporting for the arrangement.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific advice concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.