Choose the right pension scheme

Unapproved pension schemes for directors and owners

There are a variety of unapproved schemes available to directors and owners, but they don't benefit from all the tax advantages of HM Revenue & Customs-approved schemes.

Funded unapproved retirement benefit schemes (FURBS)
FURBS are targeted at owner-managers. They act as an unapproved top-up scheme, supplementing an HM Revenue & Customs-approved scheme.

Some advantages are that:

• there are few restrictions on levels of contributions and benefits
• there are few restrictions on what the fund can invest in
• you can receive 100 per cent of the fund as a tax-free lump sum on retirement
• the employer usually gets tax relief on contributions

Some disadvantages are that:

• the employee is liable to income tax on the employer's contribution
• FURBS pay tax on income, bank interest and dividends
• personal contributions do not qualify for tax relief

Unfunded unapproved retirement benefit schemes (UURBS)
UURBS can provide specific benefits to the employees at retirement. Neither the employer nor employee funds the pension scheme. Instead the employer promises the employee certain benefits, such as an income or lump sum, payable only at retirement age.

The advantage of UURBS is that since no contributions are made, there are no income tax or National Insurance liabilities. When the benefits are paid at retirement the income and lump sum are fully taxable to the member and tax allowable for the employer.

Tax rules governing both these pension plans are extremely complex, so you may want to consult a professional adviser before taking a decision. Reform of the tax rules governing pensions, with effect from April 2006, will certainly affect the relative attractions of unapproved retirement benefit schemes, so you might want to consult a professional adviser before taking a decision to invest. You can find an insurer at the Association of British Insurers website.

Subjects covered in this guide

• Introduction
• Benefits of having a workplace-based pension scheme
• Choosing an occupational pension scheme
• Choosing a group personal pension
• Choosing a stakeholder pension scheme
• Approved pension schemes for directors and owners
• Unapproved pension schemes for directors and owners
• Comparison of pension schemes
• Organisations that advise on pensions schemes
• Considerations when choosing a pension scheme
• Here's how I selected the best company pension scheme for my business