High-earner pension planning falls under corporate spotlight
UK - Towers Perrin has revealed FURBS-style pension products are seeing a resurgence of interest, as companies with employees who earn more than £150,000 (€) a year are looking to assist staff who may have to pay pensions tax upfront from next year, when a 50% tax rate for high earners is introduced.
David Bird, senior consultant at Towers Perrin, said the firm has seen an increase in inquiries from corporate clients whose staff could be hit by the new 50% tax rate applied to any taxable income over the sum of £150,000, as firms are keen to look at all of the options open to staff who might want to continue saving for retirement but who may not want to pay the additional tax straight away.
Funded unapproved Retirement Benefit Schemes (FURBS) and Unfunded unapproved Retirement Benefit Schemes (UURBS) were introduced some years ago as a means of providing executives with a vehicle for savings additional earnings above the salary cap on pensions which could not be placed in the corporate scheme. These products effectively ceased to exist in 2006 when the salary cap was replaced with the pensions lifetime allowance, though some products are still in existence under the new name of Employer Finance Retirement Benefit Schemes (EFRBS).
While he does expect to see a significant rise in the number of executives choosing to invest their additional pension benefits outside of existing defined benefit arrangements, Bird said it is possible employers will seek an alternative to the current method of remunerating staff which allows them to decide what they do with their total benefits and salary package.
"EFRBS can mirror a defined benefit scheme. Most of the EFRBS have mirrored DB benefits but employers have three options:
Employers are now looking at how they could restructure remuneration packages, according to Towers Perrin, in the hope that executives can find a tax-efficient way of facing these changes.
Both employees and employers are not seeking to avoid taxes, but are looking at whether they can re-arrange plans to give employees more control of their pay and pensions, perhaps by deferring tax payments, or by accelerating pension payments and income before the 50% tax comes into force from 6 April 2010.
Bird believes the 50% tax rate is a tough psychological barrier for employees to accept as it is generally understood, he argued, that the government needs to raise taxes, but the difficulty is it is not clear how long tax rates will stay at that level and how this could affect future pensions planning.
In the US, for example, tax rates are raised and lowered regularly, so the US market have much more pay deferral plans or options in place to tackle the problem, which might assist employers offering defined benefit pension plans and need to prepare for future salary increases.
Figures presented by Towers Perrin suggested that an individual earning £200,000 a year might have to pay 25% of their income as a pension benefit in order to tackle the change, yet tax and further national insurance (NI) increases alongside the pensions bill means they effectively knock another 10% off their net income.
On that basis, EFRBS might seem appealing to staff as a potential pensions tax shelter, according to Bird, at least as long as they believe the employer can live up to their pensions promise.
"It works well if the high-earner believes the employer's promise, and it works pretty much like the old deal, only they do not get the tax-free cash at retirement. There are some arrangements where the employer provides some security to back that promise. But it is quite difficult to get it because in these conditions it is difficult for the employer to find the assets to back it. If high earners are really worried about the covenant of their employer, the choice is going to be towards an alternative," added Bird.
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