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Understanding EFRBS – Employer Financed Retirement Benefits Scheme

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Understanding EFRBS – Employer Financed Retirement Benefits Scheme

Reviewed: 3rd June 2016

Employer Financed Retirement Benefits Schemes (EFRBS) are unregistered pension schemes offering retirement benefits to their members, often at a lower rate of tax and with no National Insurance contributions to pay.

Additionally, the annual/lifetime limits applied to registered schemes don’t apply to an EFRBS. Funds can also be invested in any asset class, without restrictions.

These schemes were originally introduced to allow employees to increase their pension savings if they had reached the ‘earnings cap’ on their registered scheme. They also appeal to employees living overseas, or who plan to retire abroad, because they can be set up either in the UK or offshore.

HMRC is currently targeting these and other similar schemes they regard as ‘disguised remuneration,’ however.

How does an EFRBS work?

A discretionary trust is used as the vehicle for this type of pension scheme. An EFRBS pension represents a ‘promise to pay’ employees and their families remuneration in retirement, but without the employer funding it in advance, as happens with a registered pension scheme.

The employee makes regular payments into the scheme, and monies are invested without the same restrictions. Sub-trusts pay out the money to individual members, often at a lower rate of tax than would otherwise apply, and with no National Insurance contributions.

When benefits are paid (when the employee retires), an interest-free loan is provided, taken over a period of time such that it’s only repaid on death from the deceased person’s estate.    

What are the main benefits of an EFRBS?

An EFRBS offers a range of benefits, including:

  • Flexibility: it’s an alternative home for retirement savings, offering greater freedom where investing funds is concerned.
  • Additional savings: employees can save over and above their annual/lifetime allowances, and are not restricted in the same way as with a registered pension scheme.
  • Retiring abroad: if any employees already work abroad, or are considering retiring outside of the UK, an offshore EFRBS provides an accessible place to save for retirement.

EFRBS structure targeted by HMRC

The government regard EFRBS as a disguised remuneration scheme, and in this year’s budget announced their intention to tackle the issue of tax avoidance within this and other similar schemes.

Non-payment/low payment of tax and National Insurance contributions is a fundamental part of EFRBS. Inheritance Tax advantages are also available as the loan is repaid free of IHT from the deceased person’s estate.

But what happens to funds in an EFRBS if the employer company experiences financial difficulties, and becomes insolvent?

EFRBS and company insolvency

If the company providing a scheme becomes insolvent, any employee with entitlement under EFRBS is placed near the bottom of the creditor hierarchy for repayment as an unsecured creditor.

Taking priority are the insolvency office-holder, any secured creditors with a fixed charge, preferential creditors, and those secured with a floating charge.

This can cause serious financial issues for anyone who has paid money into an EFRBS, particularly for those close to retirement, as they may not have any other occupational pension savings to fall back on.

If you want to find out more about how Employer Funded Retirement Benefit Schemes work, Real Business Rescue can help. We’ll identify your risk of HMRC litigation with regard to tax avoidance, and offer professional advice if you’re concerned about approaching insolvency.

With 50+ offices around the country, we’re able to arrange a same-day consultation free-of-charge to discuss your needs.

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