Employer Funded Retirement Benefit Schemes (EFRBS) (May 2010)

The 2009 Budget imposed restrictions for retirement planning for high earners and the amount that both they, as individuals, and their employers can pay into their pension arrangements. These were subsequently enhanced in the 2010 Pre-Budget Report and have been summarised and commented on by us in previous newsletters.

In the 2010 Budget, the Government made reference to reviewing Employer Funded Retirement Benefit Schemes (EFRBS). EFRBS were established under the 2004 Pensions Act as a replacement for the old Funded Un-Approved Retirement Benefits Scheme. Contributions to the scheme can only be made by the employer and are not subject to National Insurance Contributions. The contributions do not count as income of the employee for income tax purposes. They are not a deductible business expense for the employer.

As the scheme is unapproved there are few restrictions on the range of investments that such a scheme can hold. There are also no restrictions on the amount of any contribution or the total value of benefits that can be accrued within the fund. Retirement benefits can be taken at any time (provided the individual has left service) and can be taken in any form (income, lump sum or a combination of the two). Any benefits are chargeable to income and there is no requirement to purchase an annuity.

Given the considerable restrictions in the level of approved pension contributions that senior executives can now receive without incurring tax charges, EFRBS could offer employers with a way of continuing to provide attractive retirement benefits as part of compensation packages.

The main objectives of an EFRB are:

Provide a tax advantaged (Income Tax, National Insurance and Inheritance Tax) scheme to senior executives with very wide investment powers, including residential property, other alternative assets and the option to take loans at a low fixed rate of interest.
Provide senior executives with additional pension benefits where contributions to approved pensions are restricted due to the member having exceeded their lifetime allowance or the special annual allowance introduced in the Finance Act 2009.
Provide any senior executive who, for their own reasons, does not favour an approved pension scheme with the use of an alternative arrangement.

The scheme must be open to all staff members. However the likelihood is that the scheme will only be of benefit to a proportion of a company�s employees.

The most important feature of EFRBS is that they come under pension legislation, not tax legislation. This means that if it is ever the Government�s intention to stop these schemes it will require primary legislation. The tax benefits of the scheme could be eroded through a Finance Act but this would not be retrospective.

Loan Facility

EFRBS also allow members to borrow monies from their sub fund at a commercial rate of interest, which HMRC currently consider to be 4.5%. The loan facility is included in the trust deed fixing the interest rate at the prevailing commercial rate published by HMRC on the day the trust comes into effect for the lifetime of the EFRB Trust (which in all cases shall be 125 years). The trustees will have discretion as to the level of loans that can be taken by a member and in particular will ensure that the scheme never goes into deficit.

Please contact Cartlidge Morland to discuss how EFRBS could benefit your reward programmes and assist high earners in retirement planning.

Alex Reeves
Managing Director - Employee Benefits
Email: employeebenefits@cartlidgemorland.co.uk
Call: 020 7709 5560

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

Phone us on 020 7709 5560 or complete the online contact form