Pensions

IOM Self-Administered Occupational Pension Schemes for Company Directors and Senior Employees

Introduction

Occupational pension schemes offer an excellent method of providing income following retirement and are encouraged by the Government by the provision of substantial tax incentives. These tax incentives make pension provisions an important part of company financial planning.

Advantages

The primary objective of any pension arrangement is the provision of benefits to retiring directors and staff. A self-administered company scheme not only meets this objective but also offers a number of additional incentives and advantages for the sponsoring company and scheme members, a short synopsis follows:

Substantial 'tax-free' cash payments, at the time of retirement;
Flexibility in the timing and level of pension benefit payments;
Freedom from compulsory annuity purchase allowing capital preservation on death;
Security of assets and the provision of financial benefits to family members following death;
Flexible contribution provisions;
The ability to assist company finances through self-investment and loans;
The ability for directors to control the investment of their own retirement fund;
The potential to receive enhanced investment returns and pension benefits where directors/ trustees have expertise in a particular investment sector;
The ability to purchase commercial property for lease back to the company;
Explicit scheme charges.

Establishment

Self-administered schemes are extremely flexible. They are written under trust deed and may be established for a single member or for a group of members, for example a senior manager or a board of directors.
We offer tailor made self-administered pension schemes intended to provide the highest degree of control and the widest permitted investment opportunities. Trustees, who may include scheme members and/or company officials, undertake the management of the scheme. The sponsoring company controls trustee appointment and removal. An independent trustee (approved to act for this purpose by the Assessor of Income Tax) is also required; and this service is also available from Fedelta.

Approval

The power to approve pension schemes is vested in the Assessor of Income Tax. This approval exempts schemes from potential Isle of Man tax charges on all investment income and gains and provides full tax relief on all contributions and also allows substantial tax-free cash payments to be made at the time of retirement.

Investments

Typical investments of self-administered pension schemes include: quoted stocks and shares; deposit accounts; commercial property; unit trusts; investment trusts and managed funds as well as self investment in the sponsoring company (for example commercial loans to the company).

Investing in commercial property that is leased to the company can also be very tax efficient.

Investment transactions (including borrowing) are required to be on commercial terms, correctly documented, and at arms' length. Cash held by trustees must be deposited in a dedicated bank or building society account opened by the trustees. Specialist fund managers may be appointed to undertake certain investment functions or give advice as required.

The Assessor of Income Tax does place certain restrictions on investment freedom to prevent potential misuse of self-investment opportunities available under these schemes. These restrictions, however, are not onerous and generally only limit self-investment to a maximum of 50% of scheme's assets and prohibit trustees from making personal loans to scheme members or investing in personal chattels, such as cars or yachts.

Contributions

Contribution provisions are generally designed to offer maximum flexibility to meet the varying needs of sponsoring companies and scheme members. Company contributions are allowed as a business expense and contributions made by scheme members receive relief at their highest tax rate.

Benefits

Benefits become payable upon retirement. Retirement may take place at any time from age 50 or earlier should a member be unable to work due to ill health.

On retirement, part of a member's fund (typically, up to 30% of the fund value) can be taken as a tax-free lump sum.

The balance of the fund is then used to provide an annual pension calculated in accordance with regulations issued by IOM Treasury.

Substantial tax-free benefits are also permitted in the event of death before retirement. In addition, pension payments may be awarded to the member's dependants.

Payment of pensions

It is not necessary for the funds of a self-administered scheme to be 'cashed-in' at the time of retirement to buy an annuity from an insurance company as in conventional insured pension schemes. Pension benefits may be paid directly from scheme funds and investments maintained. On death, the remaining assets are used for the benefit of nominated beneficiaries rather than being lost as a windfall profit to an insurance company. Pension benefits provided under self-administered arrangements are flexible and can easily cater for changes in a member's circumstances following retirement.

Transfers

Self-administered schemes are designed to accept/pay transfer payments from/to other approved pension arrangements (either personal, occupational, insured, non-insured, local or otherwise). The investment flexibility and the absence of compulsory annuity purchase requirements makes an IOM self-administered occupational pension scheme an ideal vehicle to receive transfers from UK approved pension schemes for new residents to the IOM (see Pension Planning for New IOM Residents).

Termination

The establishment of a scheme does not require a company to enter into an endless contract. Should the fortunes of the company not continue as expected, contributions may be reduced or cancelled at any time; without penalty charges.

Example of use

The trustees may decide to invest a proportion of the fund in the purchase of new business property or equipment, which is then leased to the sponsoring company for business use. The trustees receive rent from the company (allowable as a business expense) and reinvest this in the tax-free environment of the scheme funds. The trustees are therefore able to purchase assets with funds that have accumulated tax free (obtained from company profits converted into tax allowable contributions), and the company obtains use of assets to assist in its ongoing commercial activities. Where accumulated funds are insufficient to meet the trustee's investment needs, trustees are permitted to borrow additional funds, within limits, to meet the immediate cost of the investment.

This publication is for information only and does not constitute investment advice, nor should it be used as a means of communication to the general public. Professional advice should be sought for specific tax planning situations.

Fedelta Pensions Limited is Registered with the Isle of Man Insurance and Pensions Authority as a professional Retirement Benefits Schemes Administrator.