BY JOHN ELLIS, FINANCIAL ADVISOR
Have you what is called or are in the process of setting up a ‘one-man pension scheme’? A OMS is an executive pension plan with only one or two persons in the scheme. The OMS is different from a PRSA or a personal pension as it is set up in trust on behalf of the employee who is usually a director of their own Companies..
If you have, the recent Pensions Authority announcement needs to be seriously evaluated as significant changes have been made which will affect you and your pension. Two of the main amendments include deletion of the exemption for one-member arrangements in respect of annual reports and deletion of the alternative annual report option for small DB or DC schemes,
As a result of these changes, your One-Man Scheme will now be required to produce a full Annual Report as well as Audited Accounts (which was only a requirement for 100+ members schemes!) and there will be a significant cost to the fund which could cause it to be untenable.
Due to these implications all pension providers have taken the decision to cease accepting new applications for these plans with immediate effect. For existing plans, they will continue to monitor regulatory developments and update Financial Advisors on an ongoing basis, into current plans you may continue to invest new contributions and top-ups. Corporate Business (Group Scheme) is unaffected by this announcement.
So, what are your options? If you have recently proposed for an OMS you can continue but your financial advisor will need to sign a declaration to say they have spoken to you and outlined the rational and costs to proceed. You need to confirm you understand the issue and are prepared to pay the cost of the annual report and audited accounts.
I contacted one provider, and they have declarations ready for signing but when asked the cost of the new service they could not give a figure! So be careful, sign nothing, agree to nothing until you know what you are agreeing to. Wait until there is greater clarity on fees etc.
If you don’t wish to wait you could take the Personal Retirement Savings Account route. It may be a viable alternative for many but not for all, especially not if you wish to make substantial contributions for tax purposes. Under the PRSA facility contribution limits are fixed and combine employer and employee contributions when calculating contributions for tax relief.
Here is a worked example. An employee aged 35 on a salary of €55,000 a year wishes to contribute €300 a month (EE) to his PRSA or €3,600 annually. His employer has agreed to contribution an additional € 833.33 a month (ER) on his behalf. The total contribution is deemed to be €13,600 (EE + ER) for the PRSA plan.
Here’s the nub, which was not an issue under the old OMS, the total combined contributions cannot exceed his age-related percentage of salary, ie. at his age 35 he is in the age band – aged 30 to 39 therefore the maximum that can be invested is 20% of his salary – €11,000.
Since the proposed contribution is to be €13,600 he is exceeding his age limit contribution by €2,600. This will incur to him a BIK tax bill at the marginal rate of 40% of €1,040. The employer is also penalised in that they are not allowed to claim tax relief on company contributions.
You could appoint a professional trustee company or become your own trustee but this opens up all manner of problems as according to the Pension Authority “a person shall not act as trustee of a scheme or trust RAC unless the person has the qualifications and knowledge which, together with the qualifications and knowledge of the other trustees, are collectively adequate to enable all the trustees of the scheme or trust RAC to ensure the sound and prudent management of that scheme or trust RAC”.
The way forward is the ‘Master Trust’. The key benefit of a master trust arrangement is that all trustee duties are carried out by a registered trustee company. Therefore, you will not need to appoint your own trustee board to manage the associated governance and compliance requirements as scheme governance is managed the Master Trust.
Next week we will look under the bonnet of the Master Trust.