So, what's happening to UURBS and FURBS then?
The whole thing started with the introduction of the Earnings Cap back in 1989. The Earnings Cap put a limit on the amount of income that could be used to calculate pension benefits. At the moment the Earnings Cap is around the £100,000 mark, so the maximum tax-approved pension a ‘capped’ person can have is two-thirds of that, around the £67,000 a year level. ‘Capped’ people, by and large, are people who have joined pension schemes since May 31st 1989, although the pedants among you will be aware some people joining schemes after March 13th 1989 could also be caught if their schemes weren’t actually up and running before March 14th 1989 (one of those facts that’s got “So What?” written all over it, but comes in Oh So Useful if you’re trying to pass exams in the pointlessness of all this stuff). Anyway, if you’re capped, you’re capped and that’s the end of it. Or so you’d think, but it’s not, and that’s where UURBS and FURBS come in.
Just because people can’t have approved tax-efficient pensions provided for them by their employers, it doesn’t mean they can’t have unapproved ones. Employers are able to set up unapproved schemes to give their senior, or highly-paid people extra pension benefits to those that can be attained under the tax-efficient schemes that meet the Revenue’s approval. So, loads of post 1989 job changers have ended up with two types of pension benefits being promised to them by their employers. They get tax-efficient approved pension coverage up to the level of the Earnings Cap, and can also get less-efficient unapproved benefits for their earnings above the cap too. Needless to say, this means the contracts of employment for masses of senior people in the UK workforce are pretty complicated and usually come with acres of negotiation on both sides when high-rollers switch jobs. A fairly profitable sideline for benefit consultants and other professionals involved. A nice little earner all round in fact.
Just because some pension schemes are unapproved doesn’t mean there are no rules attached to them though. Also, employers have the option of either paying for these extra unapproved promises by funding for them or just promising them and paying the promise off in the future when people retire. So, ‘Funded Unapproved Retirement Benefit Schemes’ being too much of a mouthful, FURBS is what we end up with in the argot of pension folk. Similar logic leads you to UURBS being shorthand for (you’re getting there before me, aren’t you?) ‘Unfunded Unapproved Retirement Benefit Schemes'. Simple really, just like the people who think this is a useful way for the language to develop. Anyway, back to the detail.
UURBS are, in effect, a promise by the employer to top-up pension benefits to the level they would have been at if the Earnings Cap didn’t exist in the first place. But, by being unfunded they can, over time, build up significant liabilities on employers’ balance sheets. FURBS, on the other hand, are seen by many employees as being a bit more to their liking as they know where the money is and they can keep an eye on it. By and large, the smaller the company, the more likely FURBS are to UURBS. Also, FURBS just fit better with Defined Contribution schemes anyway, and the smaller the company the higher the likelihood of Defined Contribution than Defined Benefit as the basis for the existing pension arrangements.
Employers’ contributions to FURBS are treated as taxable benefits to the employees, but the benefits can be taken as a tax-free lump sum, and they can be shielded from Inheritance Tax too. So they’re pretty popular with ‘capped’ big-earners. They used to be exempt from National Insurance too, to start with, but all that was knocked on the head in 1998, at the same time the Capital Gains Tax (CGT) rate was increased on them. But, even though 1998 was a bit of a black year FURBS-wise, they’ve still remained popular and more and more senior people are having their excess pensions funded in this way all the time. It’s become quite the thing, like a Porsche in the drive used to be.
But I’m rambling. The point of this BeeLine is to look at where FURBS and UURBS fit in with the post A-Day regime we’ll all end up in after 6 April 2005. The answer to that, you won’t be surprised to hear, is no-one knows. This was another of the things the Tax Paper was silent on and yet another issue that makes Penny-Dropping Day so important. It is possible FURBS and UURBS will just chug along as usual after A-Day, but it’s equally possible they’ll end up caught by the Lifetime Limit and holders subjected to a 60% tax charge if they don’t spot what’s happening in time and completely rearrange their finances and renegotiate their contracts of employment.
My bet is they don’t make it. I think that because the Government has recently said that the three most prominent UURBS holders (well, sort of UURBS, anyway) in the country, the Prime Minister, the Lord Chancellor and the Speaker of the House of Commons, are going to be caught by the Lifetime Limit. My view is if those guys get hit, other FURBS and UURBS guys are in the line of fire too. Simple as that.
Time will tell, of course, but one thing’s for sure. This simplification of pensions certainly is complicated.
2 July 2003
The information provided is based on Scottish Life’s understanding of current legislation and regulations, the Inland Revenue’s proposals and the Pensions Green Paper issued on 17 December 2002. These proposals are subject to consultation and may change in the future.