Both contract and trust based personal retirement benefits schemes are approved under the relevant law in the jurisdiction from which the scheme is established and managed.
How do they both work?
It is possible to establish and manage a personal retirement benefits scheme in a number of different forms, although, arguably, the most widely used and recognised in personal pension provision has been through the use of a pension trust.
It is commonplace for multi-member personal schemes, such as a large proportion of UK based Self Invested Personal Pensions (“SIPP’s”) and Qualifying Recognised Overseas Pension Schemes (“QROPS) around the world, to use a ‘Master Trust’ and individual Sub-Funds are then created for each individual scheme member in order to provide segregation.
It is also possible to replicate this arrangement using a contract based scheme, which still allows for a multi-participant personal scheme with the individual Sub-Funds. Concept has ensured the segregation of funds is achieved through holding the assets within an individual Cell of a Protected Cell Company (“PCC”) referenced to an individual’s Sub-Fund.
The schemes have been developed in order to ensure that an individual scheme member, (of a trust based personal scheme) and an individual participant, (of a contract based personal scheme) will be entitled to the same lifetime and death benefit options.
In simple terms this means that both types of schemes offer largely the same benefits. The primary differences arise in the ongoing scheme management and administration. These differences are considerations primarily for the trustees or principal parties of the trust or contract based schemes and will have little if any direct effect on the individual scheme member or participant.
So when might a contract personal retirement benefits scheme be better that a trust personal retirement benefits scheme or vice versa?
Concept has learned through its significant experience in the international pensions industry that, generally, the concept of a trust arrangement is not understood and/or not formally recognised in many civil law countries and as such membership of a trust based personal scheme can sometimes result in complex and onerous discussions between an individual scheme member and the relevant tax authority within the civil law country in which the individual scheme member is resident.
Therefore it is possible that for individuals resident in certain civil law jurisdictions, in which the concept of a trust is not necessarily understood or may not be formally recognised in local law, that a contract based personal scheme might be considered as an alternative as this may remove the uncertainty in the relevant jurisdiction and simplify the ongoing affairs and obligations of the individual.
Examples of civil law countries or territories include; Austria, Belgium, Bulgaria, China, Czech Republic, Denmark, France, Germany, Greece, Italy, Latvia, Netherlands, Poland, Portugal, Russia, Spain and Switzerland.
Several jurisdictions are now introducing legislation specifically targeting the use of offshore trust arrangements and are not necessarily differentiating or exempting a personal pension trust, a recent example of this is France. The legislation being introduced often requires detailed and onerous reporting of the interests and assets held within the trust to be declared to the relevant local tax authority in the individual’s country of residence, which ca, in turn, result in additional charges being levied by the Trustees for the additional time spent and work involved in preparing and submitting the necessary reports. Failure to report and meet the deadlines to report can also often result in punitive charges being due on the member and/or Trustees.
As a contract based personal scheme does not utilise a trust, it may potentially be that these legislative amendments and reporting obligations being introduced in certain jurisdictions will not apply to this type of scheme.
An individual should always seek to take appropriate independent, specialist financial and tax advice prior to the establishment of any personal retirement benefits scheme to ensure the suitability of the scheme for their individual circumstances. The advice taken should take into consideration the country or territory from which the personal retirement benefits scheme is going to be managed, the country or territory in which the individual is and/or will be resident, and if applicable the country or territory from which the relevant transfer of pensions benefits and/or contributions are to be made.
Should you wish to learn more about any of the retirement benefits schemes that Concept is able to offer, or require introductions to suitably qualified specialist financial and/or taxation advisers, please contact a member of our Sales & Marketing team who will be able to assist.
This and other technical guidance notes can be found within the Concept IFA login area.
This information is provided for general information only, Concept does not provide financial, legal nor tax advice, and nothing in this document should be construed as such. Concept shall not be held responsible for any liability or loss arising directly or indirectly from any reliance placed upon the content of this document. Concept recommends that all individuals should seek their own appropriate advice.