Employer Financed Retirement Benefit Scheme (EFRBS)

On 6th April 2006 the UK Government made sweeping changes to pension legislation (commonly known as pensions ‘A Day’). The changes introduced the distinction between registered and unregistered schemes where a distinction between approved and unapproved pension schemes had previously existed. Unregistered or unapproved pension arrangements in the UK essentially resulted from company requirements to “top up” executive or high earner pensions when the earnings cap for an approved pension had been reached. An Employer Financed Retirement Benefit Scheme is such an arrangement.

Features of an EFRBS

An EFRBS is established by an employer for the purpose of providing relevant benefits to its members.

As an unregistered scheme, an EFRBS is not subject to the pensions taxation regime set out in the UK Finance Act 2004.

The contributions made into an EFRBS are not tested against the members post ‘A Day’ Lifetime Allowance.

The contributions are not subject to the Annual Allowance Charge.

There is no UK income tax liability on the member in respect of contributions made to an offshore EFRBS. 

Any benefits drawn, whether as income or as a lump sum, are assessable to UK income tax as employment income.

The employer’s UK corporate tax deduction is deferred until (and to the extent that) taxable benefits are drawn.

Advantages of an Offshore EFRBS

• No UK income tax charge arises until benefits are taken.
• The possibility to defer UK income tax liabilities until such time as marginal rates of income tax are low or lower (for example, in retirement).
• Foreign income and gains may be accumulated free of UK taxation within the EFRBS. 
• Possible benefit to individuals who intend to be non UK resident in their retirement (i.e. benefits are drawn in a location with preferential levels of taxation).
• The possible advantageous use of deferred tax deductions by a loss making employer (deferring the tax deduction until such time as the employer is profit making).
• Flexibility of investments.
• Preservation of wealth. As there is no requirement to purchase an insurance annuity, pension proceeds can be fully distributed to beneficiaries following death rather than be forfeit as in the case of an insurance annuity.

Please note that following the issue of draft legislation by the UK Government on 9th December 2010 it is vitally important to seek specific professional advice to consider the content of the proposed UK Finance Bill 2011 and its impact on long‑term compensation arrangements.