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Personal investment vehicles - the growth of self-administered options Back  
Small self-administered pension schemes offer senior executives and directors in the finance sector the opportunity to manage their own retirement funds. They also offer financial and administrative benefits for employers. David Rouse identifies the rapid growth in the self-administered market.
As of mid-November 2007 there were 7,300 Revenue approved Small Self-Administered Schemes in existence in Ireland, according to the Revenue Commissioners. Budget 2006 - Review of Tax Schemes says that number was only slightly over 2,500 in 2004. A number of distinct factors explain the considerable growth in the use of self-administered schemes by executives and directors in the financial services sector. Key to their increasing popularity is the opportunity for senior personnel to take direct control of this aspect of their financial affairs, and to do something about their disenchantment with the traditional pension model.
Senior personnel in the financial services industry understand that traditional retirement planning arrangements suffer from a restricted range of investment possibilities and opaque charging structures. Self-administered schemes address these deficiencies by allowing the holder to exercise the function of investment manager, subject to certain prudential and anti-avoidance restrictions. Scheme running charges are usually levied on the employer company and not the fund itself, providing transparency of costs.

By virtue of their experience and expertise, finance executives and directors are comfortable in the role of investment manager for their personal finances. The investment opportunities presented to this audience are often structurally innovative and involve significant minimum investment levels. Provided the investment products meet Revenue compliance rules, self-administered schemes are frequently the most tax-efficient method of approaching such personal investments. Recent indexation of fund sizes means that on drawdown in 2008 an individual can have a fund with a capital value of up to €5.4 million. Projecting forward with indexation on the same basis, a fund of €14.0 million could be available to someone retiring in 20 years€ time.

Investment product providers are well aware of the growth in use of self-administered schemes and are structuring their propositions for direct participation by the schemes. Traditional geared property-based offerings were the staple of many schemes and products are keeping pace with changing sentiment. Equity-based investments employing modest gearing are more common as lenders complete their understanding of the relevant borrowing rules. Commodities investment is permitted and Revenue recently sanctioned investment in gold bullion.

The regulations arising from the 2005 IORPS Directive confirmed the facility for borrowing within single member schemes. For direct property purchases, gearing (on an annuity basis only) of up to 70 per cent to value is standard.

Employer issues
Unlike traditional pension arrangements, establishing a self-administered scheme for an executive or director requires only limited involvement from the employer company, while the on-going obligations are minimal. What is significant for the employer is that the trustees of the scheme comprise the individual for whom the scheme is established, and a professional pensioneer trustee. The pensioneer trustee is normally a corporate entity and has approved status from the Revenue Commissioners. Appointment of the pensioneer trustee means that the governance, compliance and administration obligations in respect of the scheme are removed from the employer company.

From an employer€s perspective self-administered schemes expand the range of remuneration and retention benefits offered to senior personnel. Larger concerns can incentivise directors and executives through individual schemes that are separate from the standard employee group pension scheme. In the case of smaller operations consisting solely of a team of directors or executives, each individual can look after his or her funding and investment arrangements in an independent and confidential manner. The use of individual schemes does not prohibit participation by a number of directors in the same pension investment; this can be effected through a collective investment vehicle such as a unit trust.

For both the employer and the individual, there is the protection afforded by the fact that the retirement fund is held in a Revenue regulated trust separate from the employer company. Similarly the security of the scheme is not reliant on the health of a life company€s balance sheet. In quantitative terms, the running charges and Revenue approved employer contributions are tax deductible for the employer. Employer contributions are exempt from employer€s PRSI (10.75 per cent) and do not give rise to a benefit in kind (BIK) charge for the employee.

Wealth structuring
Directors and executives in the position to shape their remuneration package will understand that the tax they pay on their income greatly affects the amount of gross earnings they retain for investment purposes. Retirement structures facilitate the retention of gross earnings, and self-administered structures allow individuals to control the timing and amount of funds paid to their scheme. Revenue funding limits facilitate individuals who may have deferred contributing to a retirement structure until reaching their forties or fifties. Using employer contributions that can amount to a multiple of salary, a senior executive can readily catch up on preceding years€ under-funding.

A final factor contributing to the attractiveness of these arrangements is that proprietary directors (directors owning more than 5 per cent of voting shares) benefit from flexible retirement and business exit rules. Such directors selling their company shares and leaving service can access their fund from age 50. This means they can take a tax-free lump sum of up to 25 per cent of the fund, subject to an indexed limit of €1.25 million. Using an Approved Retirement Fund for the remainder of their fund, the individual can continue to manage their investments and draw income as required, subject to the minimum income drawdown rules introduced by Finance Act 2006.

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