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Protecting
your assets Britain’s cats are getting fatter – fact. A recent analysis of FTSE 100 annual reports by Monks showed that, over the last 12 months, the base salary of the typical chief executive rose by 14.9 per cent to £539,000, plus bonuses. Even the lowest-paid partner in a property law firm starts at £65,000, according to a survey by TheLawyer.com. The British press may rail in indignation, but the number of high net worth individuals is rising, and benefits are an indispensable part of the package. The Earnings Cap (the limit above which earnings cannot go through a tax-approved scheme) is set by parliament and changes yearly. It stands at £95,400 for the tax year 2001/02, which would mean a maximum pension of £63,600 under the current two-thirds of final salary rule. With a significant number of people receiving salaries well above the earnings cap, how best can they ensure that maximum benefits will go to the person of their choice when they die? Inland Revenue regulations state that death in service benefits cover “a lump sum not exceeding four times the deceased member’s pensionable salary”, and a pension to the widow, widower or dependant, must not exceed two-thirds of the maximum of what they could have earned had they lived to the expected retirement date. If the individual dies after the retirement date, the lump sum “can be paid representing the balance of the unpaid pension instalments that would have been paid between the date of death of the member and the guarantee period”. These benefits are of great value to high earners, as other assets may become part of the estate, and be subject to inheritance tax, a flat rate of 40 per cent of the value of the estate, although spouses are exempt from this tax. High earners tend to be offered occupational defined benefit (DB) schemes, although defined contribution (DC) arrangements are on the increase. On the surface, they may appear to offer similar benefits, but there can be significant differences, explains Nick Couldrey, a partner at Sackers law firm: “If you take on a money purchase scheme, you’ve got quite a lot of choice of what you can do, so you could choose to buy a pension for the widow for the same amount as the husband’s pension. Or you could choose to buy no pension at all.” But when it comes to a DB scheme, he says: “A widow’s pension normally is a proportion, a set benefit, and it’s not something that the high net worth individual can play with.” He adds: “If you’re the managing director of Glaxo, you probably get what you want. But mere mortals are not going to be in a position to change the benefit structure.” Whether their company offers DB or DC schemes, many high earners choose to “top up” their pensions with FURBS (Funded Unapproved Retirement Benefit Schemes). These are attractive to high earners because while contributions are taxed, FURBS are taxed at the basic rate, the employer has tax relief on contributions, and benefits are paid in the form of a tax-free lump sum at retirement. A survey conducted by William M Mercer showed that FURBS “continue to be the most popular method of augmenting executive pensions”, with 34 per cent of employers opting for this method, and a growing number of executives negotiating top-up benefits on recruitment. Of those that replied, 58 per cent claim to have a formal policy for pensions restrictions, offering FURBS, UURBS (Unfunded Unapproved Retirement Benefit Schemes), or additional salary, with 42 per cent citing FURBS as the main vehicle. Unapproved schemes are obviously valuable to many high earners, as the money is expressed as a pension, but taken as a tax-free lump sum. However, Nick Couldrey issues a caveat – if the member defers taking his tax-free lump sum for a couple of years and dies suddenly, there shouldn’t be any problems. “If, on the other hand, the man is extremely ill and has been for many years, then he’s clearly omitting to exercise a right. By omitting to exercise a right, the asset can be brought into charge for inheritance tax under the ‘gift with reservation’ legislation,” he warns. For high earners who want to ensure their spouse is well provided for in the event of their death, there are options within their approved scheme to provide widows or dependents pensions, totalling four ninths of the employee’s final salary (two thirds of two thirds of the final salary) – a maximum of £42,400. A regular income of over £40,000 is not to be sniffed at, even by high net worth individuals, but the security of a spouse’s pension is currently denied those who are not married, or who have same sex partners, unless very stringent tests of dependency can be proved as in the recent case of an SAS soldier’s unmarried partner being denied the right to death benefits from his army pension. The Inland Revenue’s definition of a dependent is a child of the member (up to age 18), a person dependent due to disability, or a person who is financially dependant or mutually dependent on the member. Although the Inland Revenue allows for an unmarried partner who may fall into the last category, financial dependency is very difficult to prove if a couple is not legally married. At present, unmarried partners can benefit from the lump sum which can be left to them on their partner’s death through an ‘expression of wish’ form, although even this can be overridden by trustees if they feel that someone else – a child from a previous marriage – has a more valid claim. Some personal pensions providers are starting to recognise unmarried partners’ rights when it comes to death benefits, and Massow Rainbow, an IFA which offers various lifestyle options, has produced the Freedom Pension, designed specifically for same-sex or unmarried couples. Marketed as “the UK’s first truly gay-friendly pension”, and underwritten by NPI and Friends Provident with stakeholder charges, it not only guarantees recognition of the unmarried partner without having to prove financial dependence, but will also only invest in companies with non-discriminatory working practices. The Freedom Pension clearly represents a major step forward, but recognition of your partner within a personal pension may not be the most lucrative option, says Nigel Ranger, head of corporate pensions at Massow Rainbow: “Even though it’s not going to be paying out to your same-sex partner when you die, the benefits of a final salary pension scheme are worth so much that there’s no way you could fund the same sort of benefits in a personal pension – it would cost you a fortune.” Whether such details are important to high net worth individuals will depend on the degree of ‘worth’. As Rob Wild, European principal at W M Mercer, puts it: “If chief executives come in and say ‘I want four times pay as a general lump sum, paid under discretion, and I want the equivalent of my spouse’s pension paid to my unmarried partner, of whatever sex’, it may well be difficult for the company to say ‘no, you can’t really have that’. There is clearly a balance of power issue.” It is not really surprising that CEOs can call the shots, but for high earners who aren’t quite in that position, the options are limited. “FURBS is probably easiest, but it’s by no means hazard free,” says Nick Couldrey. “A death benefit under a pension scheme is very useful to preserve capital, or create capital in the event of an unexpected death: it’s like an insurance policy. But once you get to the age of being a pensioner it becomes less and less useful.” Death benefit options open to high earners would appear to be quite limited; politics will determine whether you consider this to be good or bad. But once you have contributed the maximum to an approved scheme, the possibilities and pitfalls of unapproved schemes, along with other tax-effective savings vehicles can be considered. But those matters are strictly between you and your offshore accountant. - Pensions Age November 2001 -
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