Retirement Annuity Trust Schemes (RATS)
Background • A lump sum of 30% of the value of the fund
can be taken on the date the pension
With only a limited number of retirement annuity
commences. There is no requirement to
contracts (RAC) and personal pension schemes
commence drawing an annuity at the time
(PPS) available in Guernsey, the popularity of
that the lump sum is taken.
RATS is growing rapidly. Basically a RATS is a
discretionary trust which acts as a self • The trustees are able to invest in a wide
administered private pension scheme for range of asset classes.
individuals resident in Guernsey. RATS are very
flexible pension vehicles and are capable of Eligibility
approval by both the UK and Guernsey Tax
authorities. Both residents and non-residents of Guernsey are
eligible to join an approved RATS.
Guernsey pensions tax legislation was developed
further during 2011 with the aim of encouraging Services provided by PKF (Channel
individuals to save towards their retirement. The Islands) Limited
new regulations are effective from 1 January • Guernsey and UK compliance and planning
2011 and are included within these notes. • Audit and accountancy
• Specialist taxation and estate planning
• As for Retirement Annuity Contracts, a • Payroll and outsourcing
pension must be taken from a RATS some
time between the member’s 50th and 75th
birthday, however it is not necessary to
purchase an annuity.
• A member may take a loan from the RATS
subject to certain conditions.
To find out more please contact:
PKF (Channel Islands) Limited PO Box 296 Sarnia House Le Truchot St Peter Port Guernsey GY1 4NA
Tel: + 44 (0)1481 727927 Fax: + 44 (0)1481 710511 Email: email@example.com Internet: www.pkfci.com
Frequently asked questions about RATS and Trustees and intermediaries promoting
Retirement Annuity Contracts (RAC)/Personal RATS must have an awareness of, and
Pension Schemes (PPS) comply with, the provisions of the
Retirement Annuity Trust Scheme Rules,
1. Following the changes in rules relating to 2010 which were published by the Guernsey
the approval of trustees, can a member or Financial Services Commission in 2010 and
a relative of a member be a trustee of the came into force on 1 January 2011.
3. Can I transfer my Guernsey home into a
Yes, but only if the trust deed specifically RATS?
provides that the trustees act by majority and
the majority of the trustees are neither Yes. Once in the RATS, occupation of the
members of the scheme or relatives. This property must be subject to a commercial
does not apply with RAC/PPS which are rent payable to the scheme. Such rental
administered by insurance companies. income will be exempt from liability to
Guernsey Tax in the hands of the trustees.
2. Can anyone be a trustee of a RATS? Such transfers are not possible with
Yes, subject to 1 above. However, any
trustee who is not a professional trustee is 4. Can I transfer my commercially let UK
required to sign a Code of Practice issued by property into a RATS?
the Director of Income Tax. This certifies
that the individual understands his role and Yes. Note that the rental income will be
responsibility as a trustee under the Trusts subject to UK taxation. Again, such transfers
(Guernsey) Law 1989. There is also an are not possible with RAC/PPS schemes.
overriding requirement that there must be at
least two Guernsey resident trustees. 5. I run my own incorporated business. Can
However, if a trustee of the scheme is an I transfer the company shares into a
independent professional trustee, one such RATS?
Guernsey resident trustee would be Yes, subject to a restriction. Where a
sufficient. member, together with any other member or
relatives owns more than 15% of the issued
share capital of the company, not more than
10% of the value of the pension fund can be
invested in the company. Such transfers are qualify as a QROPS, this minimum age must
not possible with RAC/PPS schemes. be reflected in the RATS instrument.
6. Can I borrow funds from a RATS? At the time of writing, UK regulations
governing the approval of schemes such as
Yes, provided the loan does not exceed 30%
QROPS are the subject of consultation and it
of the total value of the fund and is subject to a
is anticipated that further restrictions will be
commercial rate of interest. There is also a
applied, with effect from 6 April 2012, if
requirement that any loan must be repaid
new schemes require approval as QROPS or
before benefits commence to be drawn down.
existing schemes wish to continue to claim
It is not possible to borrow funds from a
QROPS status. In anticipation of the
RAC/PPS. The trustees would be required to
introduction of further restrictions in the UK,
obtain adequate security for the loan.
the States of Guernsey is introducing
legislation that allows the establishment of a
7. I have a UK pension scheme and have new pension vehicle referred to as a “S.157E
moved to Guernsey to work. Can I scheme”. Pension scheme administrators are
transfer my UK scheme into a Guernsey required to apply to the Tax Authorities for
RATS or RAC/PPS? approval under the new legislation by 16
Yes. However, some trustees may be March 2012. The change in status will have
reluctant to transfer the value of protected Guernsey tax implications and further advice
rights and clearance from the trustees should should be sought.
be sought beforehand. Prior approval of the
tax authorities to the transfer may also be 8. If I transfer my UK pension fund, which is
required. currently valued at £2m into a Guernsey
RATS or RAC/PPS, will I still be entitled
It should be noted that with effect from
to draw down a quarter of the fund as a
6 April 2006, following the introduction of a
tax-free lump sum, as permitted under
simplified pension scheme tax regime in the
UK, the reciprocal arrangement was
terminated. However transfers of pension Yes. From 1 January 2006 lump sums paid
funds from the UK are possible provided the out of pension funds transferred into a
RATS is registered with HM Revenue & Guernsey RATS will not be subject to the
Customs as a Qualifying Recognised maximum tax-free limit which, under current
Overseas Pension Scheme (QROPS). legislation, is £167,000. All pension funds
Following a recent increase in the minimum arising from contributions made in Guernsey
age from which benefits can be drawn under will continue to be subject to the tax-free
UK pension scheme rules from 50 to 55, to limit.
9. If I transfer my UK pension fund into a guarantee that the funds in the scheme will
Guernsey RATS or RAC/PPS, will the be sufficient to pay an annuity until your
funds be afforded the same protection death. Contrast this with an RAC/PPS where
from a UK Inheritance Tax charge as is an annuity will be purchased by the
available to the UK pension fund? insurance company.
Yes but this is a specialist area and requires
specific advice depending on individual
13. When I commence to receive an annuity
from a RATS or RAC/PPS scheme, can I
circumstances. You should contact PKF
pay the Guernsey tax due by instalments
(Channel Islands) Limited for further
in June and December?
No. Other than the tax-free lump sum, any
10. Do I have to be retired before I can draw benefits drawn from the scheme will be
a pension from a RATS or RAC/PPS? subject to taxation at source under the
Employees Tax Instalment (ETI) Scheme.
No. You can start to draw a pension at any
time between the ages of 50 and 75 even if
you are still working. Similarly, you do not
14. If I die, can the remaining funds in the
RATS or RAC/PPS scheme be used to
have to draw a pension as soon as you retire.
provide a pension for my spouse?
11. Can I draw a tax-free lump sum but not Yes. The terms of the Trust Deed or the
draw a pension thereafter? pension contract may allow for the provision
of a pension for the surviving spouse.
Yes. There is now much greater flexibility
in relation to drawing benefits from the
scheme and with effect from January 2011, it
15. Once the member and spouse have both
died, what will happen to any funds
is no longer a requirement to draw an
remaining in the scheme?
annuity at the time of drawing the lump sum.
Any funds used to purchase an annuity from
12. Do the RATS trustees have to buy an an insurance company that remain on death
annuity from an insurance company will usually revert to the insurance company.
before I start to draw benefits from the If an annuity was drawn directly from the
scheme? RATS, any remaining funds will be subject
to a tax charge at the rate of 20%.
No. Unlike RAC/PPS schemes which are
Thereafter, the remaining funds will be
insurance company run schemes, an annuity
available to distribute to other beneficiaries
style payment from a RATS can be drawn
as provided for in accordance with the terms
directly from the funds in the trust subject to
of the Trust Deed. Contrast this with a
a regular actuarial valuation of the funds.
RAC/PPS where the remaining fund reverts
However, in these situations, there is no
to the insurance company.
16. If I die before drawing any benefits from 19. Is there a maximum contribution I am
the scheme, will my pension fund be able to make each year?
subject to a tax charge?
Prior to 2011, for individuals under the age
No. In the case of a RATS the funds will be of 40, the maximum contribution is £13,600
treated as capital for tax purposes and will per annum. For individuals who are 40 years
not be subject to a tax charge if the trustees old or more and not a member of an
distribute the funds to other beneficiaries in employer’s occupational scheme, the
accordance with the terms of the Trust Deed. maximum contribution is £20,000 per
If the trustees start to pay a pension, for annum.
example to a surviving spouse, Guernsey tax
With effect from January 2011, the
will be payable in the normal way and
restriction on the amount that can be
thereafter, any remaining funds will be
contributed has been completely removed.
subject to a tax charge at the rate of 20%.
20. Will I be entitled to tax relief for the whole
17. If I move abroad to a country other than of my contributions?
the UK can I transfer my RATS or
RAC/PPS fund to my new country of Not necessarily. Prior to 2011, if you were
residence? under 40, you were entitled to tax relief on
your contributions up to 15% of your net
Yes. However, on transfer to Jersey, Isle of
relevant earnings. For instance, if your net
Man and Ireland, the fund will be subject to
relevant earnings were £50,000 and you
a charge to Guernsey tax at the rate of 10%
contributed the maximum annual
of the value of the fund. Transfers to
contribution of £13,600, you would have
schemes in other jurisdictions may be subject
been entitled to tax relief of £7,500 (i.e.
to a 20% tax charge.
£50,000 at 15%).
18. If I move abroad and have already started If you were 40 years of age or over and not a
to draw benefits, am I able to transfer my member of an employer’s occupational
RATS or RAC/PPS fund to my new pension scheme, you were entitled to tax
country of residence? relief on contributions up to 25% of your net
relevant earnings. For instance, if your net
No. Once benefits are drawn, it will not be relevant earnings were £60,000 and you
possible to transfer the fund. It will continue contributed the maximum annual
to be treated as a Guernsey pension fund contribution of £20,000, you would only
subject to Guernsey taxation. have been entitled to tax relief of £15,000
(i.e. £60,000 at 25%).
With effect from January 2011, tax relief is 22. I am not employed. Am I still able to
available for all contributions up to a make contributions into a RATS or
maximum of £50,000 per annum. Tax relief RAC/PPS?
will be granted against all sources of
Yes, prior to 2011 there was a limit of
assessable income and not just against net
£6,800 that could be contributed annually
into a scheme. However, no tax relief was
available for the contributions. With effect
Note that the same maximum allowance of
from January 2011 the limit has been
£50,000 applies to a married couple as it
removed and tax relief is now available
does to a single person.
against all assessable income, as noted in 20
21. If I do not contribute the maximum
annual amount each year, can I carry
forward the unused capacity and increase
23. I am currently a member of my
employer’s occupational pension scheme,
my contributions in the following year?
can I still set up a RATS or RAC/PPS and
Prior to 2011, provided you held a RATS or make additional pension contributions?
RAC/PPS throughout (although it was not
Yes, there is no restriction on setting up a
necessary to have made contributions
RATS or RAC/PPS if you are already a
throughout), it would be possible to carry
member of an occupational scheme. Prior to
forward the unused capacity for up to 6
2011 tax relief for contributions to a RATS
years. However, tax relief for the additional
or RAC/PPS was dependent on whether the
contributions would only be available at the
individual had “relevant earnings”. These
rates indicated in 20. above. With effect
from January 2011, any unused capacity
brought forward is irrelevant as the limit on a. Income from employment where the
annual contributions has been removed. individual is not a member of an
There will be a facility to carry forward any occupational pension scheme.
unused tax relief under the new regime for b. Income from self employment
up to 6 years. For instance, an individual
making contributions of say £10,000 in a c. Income from employment where the
year will be able to carry forward the unused individual is a member of an
relief of £40,000 (see 20 above) and increase occupational pension scheme but will
the tax relief available in a subsequent year not receive the maximum benefits
to £90,000. permissible from that scheme at
normal retirement date.
Occupational schemes may be final salary scheme contributions but would not receive
schemes or money purchase schemes with maximum benefits he could still contribute
“guaranteed target benefits”. The benefits the maximum to a RATS or RAC/PPS of
are generally calculated as a fraction of the £13,600 per annum.
member’s pensionable salary, multiplied by
This condition was removed with effect from
the member’s years of service subject to
limits imposed on the scheme by tax
legislation. Maximum benefits would be
1/60th of final remuneration for each year of
service, subject to a maximum of 40/60ths or
If you would like further information please
2/3rds of final remuneration.
contact André Trebert at
In short, if an individual’s membership of an firstname.lastname@example.org or on +44 (0) 1481
occupational pension scheme was 727927.
insufficient to provide the maximum benefits
on retirement i.e. 40/60ths of final salary, or if
an element of his earnings were non- This document has been prepared as a general guide. It is not a
substitute for professional advice. Neither PKF (Channel Islands)
pensionable (e.g. bonuses) he would have Limited nor its directors or employees accept any responsibility for
relevant earnings (and the whole of his loss or damage incurred as a result of acting or refraining to act
earnings were classed as relevant earnings). upon anything contained in or omitted from this document.
PKF (Channel Islands) Limited is a member firm of the PKF
If a member was able to receive maximum International Limited network of legally independent firms and
benefits on retirement he would have no does not accept any responsibility or liability for the actions or
relevant earnings. inactions on the part of any other individual member firm or firms.
With effect from January 2011, whether an
individual has relevant earnings is now no
longer considered and tax relief is available
on all contributions subject to the limits
referred to in 20 above.
24. What are the contribution limits if I am a
member of an occupational scheme and
also have a RATS or RAC/PPS?
Contributions into an approved occupational
pension scheme are not taken into account
when calculating how much can be
contributed to a RATS or RAC/PPS each
year. As such, prior to 2011, where an
individual made occupational pension