In the second of a four-part series, Jonathan Crowther, freelance consultant, compares registered and unregistered pension schemes
Last month's article looked at some of the complexities of the new registered pension scheme (RPS) regime.
The compliance regime for unregistered schemes compared to the RPS regime is 'light touch' and no specific qualification is required to administer an unregistered scheme.
All reporting can be done through the SA900 annual self assessment trust return (which must be filed electronically by 31 January or by hard copy by 31 October following 5 April). The SA900 is available online and can be downloaded as an easy-to-use Microsoft Excel spreadsheet, either as a standalone version or with an underlying database, from www.SA2000.co.uk. This return allows both paper based and internet based filing of the return. It also includes the offshore trust capital payments reporting form, 50FS.
Unregistered schemes are simple to administer and not subject to any sort of penalty tax regime. Indeed they are essentially the only retirement benefit vehicles available where:
• the Annual Allowance (£215,000 for 2006/07) and Lifetime Allowance (£1.5m for 2006/07) limits are likely to be exceeded;
• there is a requirement to invest in residential property and/or chattels such as works of art or fine wines;
• the individual has not been resident in the UK in one of the preceding five years, and;
• retirement is anticipated before age 55 after 2010.
The majority view at the moment appears to be that unregistered schemes are not attractive and, unlike Funded Unapproved Retirement Benefit Schemes (FURBS), will not be used to any great extent because of their unfavourable tax treatment compared to an RPS. However there is a growing minority view that they are very attractive schemes.
While an onshore unregistered scheme would be subject to income tax and capital gains tax in the same way as an onshore trust, an offshore unregistered scheme would only be subject to income tax on its UK source income. Whereas contributions to an RPS are deductible for the employer when made, they are only deductible when retirement benefits are paid out by unregistered schemes. Nevertheless there is a deferred deduction available to the employer. But contributions to unregistered schemes are not taxable on the employee or subject to national insurance contributions (NIC) until paid out. A model can be built comparing the economic costs of a contribution to unregistered schemes with a direct bonus payment which, when coupled with tax-free roll up offshore and no employer NIC being payable when benefits are paid, demonstrates a significant economic benefit for both employer and employee in using an unregistered scheme over a direct bonus payment.
Benefits deriving from contributions by employees to unregistered schemes are tax-free although the employee receives no tax deduction on the contribution. Nevertheless if the unregistered scheme is offshore it can provide a tax-free roll up vehicle and payments made out of employee contributions are not taxable.
The interaction of the offshore trust anti-avoidance rules with the unregistered scheme rules is not clear, for example, would ICTA 1988 s.739 apply to income arising from employee contributions?
Also, 'excluded benefits' may not be taxable. Excluded benefits are:
• benefits in respect of ill-health or disablement of an employee during service;
• benefits in respect of the death by accident of an employee during service;
• benefits under a relevant life policy, and;
• benefits of any description prescribed by regulations made by the Board of Inland Revenue.
The inheritance tax treatment of unregistered schemes is far from clear. There are no explicit rules other than those applying to transitional FURBS and it is not clear that these rules, which are explicitly transitional, would apply to the new post-6 April 2006 Employee Funded Retirement Benefits Scheme. There are of course extensive and comprehensive inheritance tax rules applying to funds within the RPS regime.
My own view, for what it is worth, is that the existing pension fund inheritance tax regime applies to unregistered schemes but will be developed, both statutorily and through the courts, as cases come before HMRC.
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