Guernsey Personal Pensions (RATS)

We all want to retire from work and enjoy our sunset years. So that is already your investments and savings goal.
The maths are really simple, as to why with a RATS you get more 'bang for your buck'.

So here goes (it is really simplified to illustrate why it works),

Mr. Saver can save £200 per month so you take out a savings plan invests in the (fictional) Superdooper Investment Fund that pays 5% per year income (the amount is to illustrate tax on income and most certainly isn't real).

Mr. Saver over 30 years will have saved and received back £167,426 but he would also have paid £19,085 in tax on the income, so really he got back £148,340

Mr. Pension also saves £200 per month in his RATS, and the RATS invests in the very same fictional fund. Guernsey Income Tax also gives him an extra £40 a month. Also, he doesn't pay any tax on the income, unlike Mr. Saver.

Mr. Pension then has a Pension pot worth £200,911 after 30 years

Ok, what is the catch?

Well, Mr. Saver doesn't pay any tax if he wishes to spend the money, and all at once.

Mr. Pension only pays income tax on what he receives as a pension, the fund keeps growing free of tax. Its job is to give Mr. Pension a regular income without the hassle of having to work. For this benefit, he has to pay tax on the way out.

So the moral of this story is, if you are planning to avoid having to work into your 70's then you need to get a pension going. If you want to just create some savings, then it is not the best option.

This is a super simplified illustration for tax purposes only, the fund has no Capital growth, the fund pays a fixed income. This would not be the correct type of investment for a Pension. The illustration is to explain the tax advantages of a pension, and is not a real illustration in any way shape, or form. 

So surely the States will close these schemes down? 

Pensions have evolved as a way of reducing the populations dependance on the State providing a Pension, these schemes are in their interest so it is highly unlikely to change in the forseeable future. They need you to become self sufficient in retirement and also keep paying tax!

• You can only obtain tax relief on contributions up to £35,000 per annum

• You can't get tax relief on assets that are put into your RATS (i.e. a property or shares in company or business)

• We don't have inheritance tax here so unlike the UK it doesn't form that part of a plan, but it is very useful for estate planning

• If you do have children in the UK though you could have the RATS establish a QNUPS for them on your demise, if you want to give them the gift of security in retirement.

Mind you in the United Kingdom the exchequer just couldn't keep his hands of dividend income in pension funds, and also so much money flowed into them they had to start introducing lifetime allowances as to the maximum size of the schemes.

Getting educated about your retirement and wealth-management options is a necessary part of planning for your financial future. But let’s be honest: Not everyone has time to be a financial expert. If you would rather have an easy plan you can execute without having to constantly worry about changes in legislation or the economy or financial products, you might consider hiring a financial advisor.

What you need to know:

• Financial advisors or planners counsel people on wealth management and other personal money matters.

• Financial advisors can just draw up plans, or recommend specific investment products and vehicles.

• Financial Advisers earn their money, depending on the product or service, we may charge a fee, receive commission on the investments or even charge on time based work. All of this is explained before you enter into any contract.

• At Fairfield we like to structure our investment advice so that it is not based on us earning transactional fees. Sometimes this is not always possible depending on the product provider or platform. If we make a recommendation these charges and costs will always be included.

• We understand funds and fund managers, we also provide advice and guidance around specialist areas such as portfolio aggregation risks

• Sometimes doing nothing is the best advice, we are not afraid to say this.

• At Fairfield we want to be your trusted adviser, we know it takes years to earn this, and we do this by being as transparent and clear about our advice as we can.

• We specialise in cross border estate planning, particularly with the United Kingdom

In a Guernsey RAT it is possible to borrow up to 30% of the fund, normally you will have to provide security and you should almost always pay interest at least at a minimum of once a year. These are determined by the Trustee and how the scheme rules are established and what has or will be agreed with the Guernsey Revenue Service.

• There is one simple rule the loan must never exceed 30% of the value of your pension pot. If the investments dramatically fall you may find yourself having to repay the loan to bring the loan account to 30%.

• These rules are enforced by the Trustees of your RATS (we are not Trustees, we are on your side), it is down to them how they treat and manage loans. 

• You must repay the loan upon retirement (between 50 and 75 years of age), this is effectively your tax free lump sum. From then on the RATS must pay you at the minimum an annual pension (drawdown).

By having a Financial Adviser you have professional advice and impartial advice on hand to look after your interests. 

Firstly you have to understand the two types of trustees

There are two types of Trustees in Pensions, those who are regulated and those who are personal trustees. Both have an obligation to manage and book keep each and provide annual statements, however they are different for the following reasons: -

Personal Trustees - Cannot charge for their service, this is by way of business and would require that they are regulated. Also personal Trustees are not bound by the Pension and Gratuity Scheme Rules issued by the Guernsey Financial Services Commission. At a minimum one personal trustee must be resident in the Bailiwick at all times.

Regulated Trustees - Charge for their services, they are bound by the Pension and Gratuity Scheme Rules issued by the Guernsey Financial Services Commission. They will charge for responsibility fees as well as ensure that the Scheme rules are reviewed at a minimum every three years.

Personal Schemes - These were very popular in the early 2000's however they are single member RATS, they also present problems in administering the scheme to regulated trustees due to the scheme requiring regular reviews and deeds of amendment issued when necessary. This can prove quite expensive and therefore there is less and less appetite for regulated trustees to undertake this type of business.

Multi-Member Schemes - These are Schemes specifically written for individual plans to adhere to, they act as the rules for each plan and also ensure that each plan is totally segregated from each other. This has the advantage that cost of managing the scheme is shared between members or forms part of the annual trustee fee.

Family Schemes - A hybrid of the multi member scheme, where the plan members are connected, this allows families to share the cost of administration and give the younger members a chance to build a decent investment pot without the costs eroding the plan in the early years. This can also have a single investment portfolio again saving costs but the trustees have to be able to clearly identify each members pot. The difference is that these arrangements allow costs to move between plans which is not permitted on multi member schemes. 

Actually more than you may realise they are responsible for the following:

• Undertake the engagement and disengagement of investment advisers/managers/custodians

• Delegate the power of investment and advisory direction as you see fit

• The collection and maintenance of documents that are required under Anti-money laundering legislation (for themselves and other intuitions engaged in the arrangement)

• Undertake suitability oversight of these engaged parties

• Prepare the accounts, regulatory filing and compliance

• Meet tax and reporting requirements that the scheme is under obligation to make

• Operate the plan in line with the Scheme Rules and applicable regulation

• Ensure the scheme rules and scheme remains concurrent and fit for purpose

• Maintain GAD calculations when in drawdown

• Loan advances and administration

• Make recommendations in respect of actions that are permitted by the scheme rules and the tax office

• Undertake an annual review of your plan

• Undertake a review of the Scheme rules at least every 3 years

• Separately account for sub funds (arising from the taking of lump sum cash benefits)

• Engage an independent portfolio assessment firm on your behalf

• Operate the Plan’s bank accounts

• Arrange payment of your pension

This is very much about understanding your needs, both current and future. Most people just need a simple managed investment portfolio funded by their employer and deductions are made through the payroll and paid straight to the investment portfolio. These are a few points that may help you find the right plan.

We have illustrated how costs can mount up, many of these are charged by the Trustee as part of their services. Not all Trustees charge the same and many of these may be enveloped in additional charges such as a 'compliance fee', 'tax filing fee' etc. Our goal is to help you understand your needs and match them what you require. At the end of the day, keeping costs appropriate is the key to ensuring higher net returns. 

Self Directed Investments

Some trustees enforce the requirements in different ways and to different levels in the way that you (the Member) direct the investments in the RATS. You should have to evidence some experience in what you are investing in and understand how the markets work and that you understand the risks that your investment decisions hold.

Do remember that this is a retirement vehicle, it shouldn't hold highly speculative investments like Crypto Currency. By the products own design it is supposed to be a long horizon investment with lower volatility. It isn't like we have Capital Gains Tax in Guernsey so why would you use this vehicle.

You will need a stockbroker and a custodian

[Costs = Execution only dealing + Custody)]

Investment Adviser or Investment Manager

We at Fairfield are Investment Advisers, we make recommendations to you the Member our recommendations as to what you should hold based on your needs and expectations. Refer to Investment Advisory as to how the process actually works, at Fairfield we commonly use an investment platform to make the recommendations.

[Costs = Investment Advisor + Platform(includes dealing and custody)]

Investment Manager

This is the activity of an Investment House, of which we have a few here on the island, and the investment manager has the role of an investment adviser as well as full discretion over the investments of the plan. An Investment Manager will deal directly into the market and you will incur dealing and custodian costs. You have a much wider range of what the Manager can invest in and potentially tailor this to any particular sector that you favour. This is by far the most expensive route but gives the widest choices of investments. 

[Costs = Investment Adviser + Investment Manager + Dealing + Custody]

Trustees Investment Monitoring Costs (Applies to all above)

All trustees have a duty to monitor, and will be expected to monitor investment volatility and diversification, this applies to all of the above. We at Fairfield have an understanding with our Trustees that we deal with and this service is included in our investment advisory cost. This is not the case with all Trustees and they may also use an external benchmarking service to identify how the investments are performing in comparison to the rest of the market. This can cost up to £250 per quarter as a guide (complexity plays a big part in this cost).

[Cost = circa £400 to £1,000 per annum]

Loans

These do cost time and money to administer, try to make arrangements but one key point is that your Plan needs to have a bank account. That means more work and therefore more expenses. To keep costs down why not suggest that you pay the interest once a year by standing order. Don't start repaying the loan capital unless you repay the whole lot, the rule of thumb is keep the transaction numbers down.

Loans require that a security is taken, this can also be a costly exercise, and as such the Trustee may want to register a charge against property for example. This is very much driven by the risk appetite of the Trustee.

[Cost = transactions + annual interest + annual reviews]

Unlisted Equities

Again certain plans are able to hold these, there are limits in respect of companies that you hold a controlling interest in. This may be part of your retirement strategy but it has limitations as you can only hold 15% of the company.

[Cost = securing title + annual accounts + oversight ]

Property

It is inadvisable to hold property directly in a Trust and should be enveloped in a company for this purpose providing that the company has no other activities. Properties must be 100% owned by the RATS and split interests are not permitted. You are allowed to mortgage these properties.

[Cost = securing title + managing agent + bank account + directors + incorporation/annual fees + insurance]

Conclusion

These are a few of the major deciding points as to what you should consider when choosing a Pension Trustee, as you can see that choosing the investment path is a major cost factor. Also having a plan that can make a loan that you don't use incurs underlying costs that are not always visible in the promotional literature.      

This can be a particular problem for those nearing retirement and their pension pot is about £50,000 or less. It my be better to look at obtaining a full commutation and paying the tax. The Trustees fees will be eroding the Capital in the pension pot, so you will not save money in the long run. You should seek professional advice as other factors will need to be considered.

We provide an independent plan review service, whilst we cannot give specific tax advise or redraft deeds, we understand the obligations that trustees are required to follow and also may suggest alternatives.