Employer financed retirement benefit schemes, or “EFRBs”, are unregulated pension schemes set-up by an employer to provide benefits to its employees without the constraints of the regulations imposed by the Financial Conduct Authority (“FCA”) on conventional pension schemes.
There is no ability for the pension scheme provider to be subject to the control of the Pension Regulator or the Financial Conduct Authority, although beneficiaries similarly will not gain the protection of such regulations should the pension scheme fail.
However, as with a lot of EFRBs, they tend to be invested in assets within close control of small owner-managed businesses where such risks are mitigated.
What is the benefit of an EFRB?
An EFRB consists of trusts set-up to benefit employees, quite often including senior management of the business/company (and, potentially, their family members). As an EFRB is unregulated there is no restriction on the sums invested or the type of assets which may be held by the pension scheme.
There is no limit on the sums that can be paid into an EFRB (as exists for UK pensions), either annually or during an individual’s working life.
From 2011, upon payment of retirement benefits from an EFRB then the employer company can deduct such benefits for the purpose of corporation tax. Accordingly, in the right circumstances, an EFRB can be an extremely tax efficient method of rewarding employees in retirement.
Who can benefit from an EFRB?
Generally an EFRB is only appropriate for larger sums sought to be set aside which exceed the amounts conventionally permitted to be paid into a UK regulated pension.
- an EFRB would suit individuals who are not UK domiciled or who intend to retire overseas, and therefore may not be subject to the UK pension regulations;
- a legitimate use of an EFRB may be to increase pension savings where the UK lifetime limit on an approved pension scheme has been reached or to provide a fund for non-domiciled employees of a UK company.
An EFRB may also have inheritance tax benefits, although we would recommend you seek the appropriate tax accounting advice before entering into any EFRB scheme.
What are the costs of an EFRB?
EFRBs often incur large set up costs in terms of the arrangement fees and the management fees and cost to the trustees and therefore are more appropriate for larger organisations or larger investments.
- an EFRB will also not protect beneficiaries from the protection provided by the Pension Regulator and the Pension Protection Fund in terms of valuation requirements;
- in the event the EFRB is unable to meet the financial demands of its beneficiaries (where a regulated fund may meet up to 90% of pension requirements for a failed pension fund).
Additionally, and perhaps most importantly, if an EFRB is considered to comprise disguised remuneration then additional penalties and charges may be applied, particularly under the amendments to the income tax legislation brought in by the Finance Act 2011 and the Finances Acts 2017 in respect of disguised remuneration.
In recent years EFRBs have increasingly been used as a mechanism for smaller companies to pay their employees or directors as part of a tax planning measures.
Whilst this may be appropriate in certain circumstances (as described above) such schemes were excluded for the purpose of income tax by amendments in the Finance Act 2011.
The Finance Acts 2017 have led to amendments to the income tax legislation and provided for loan charges to be imposed as taxes on any “loans” taken out after 1999 and which remain outstanding as from April 2019. Whilst these loan charges are mainly intended to apply against any or all schemes intended to comprise loans made via Employee Benefit Trusts, these charges will almost certainly have an impact on beneficiaries of historic EFRBs.
At Francis Wilks & Jones we are able to assist with negotiation of HMRC claims or any risks arising following claims for a breach of a director’s fiduciary duties in entering into such a scheme or HMRC enforcement action for recovery of income taxes that should have been paid by an employer or employee. Please call any member of our tax disputes team for assistance. We are here to help.