As part of the debate on the draft Act on the Phasing Out of Self-Administered Pensions, the NnavV has been published. This document does not answer all the many questions raised in response to the bill.
We set out the phasing out of self-administered pensions in our memorandum Self-administered pensions have been abolished. What now?.
Making the policy premium-free before 1 January 2017
The NnavV confirms that continuing to accrue pension entitlements under self-administration after 31 December 2016 will result in the entitlement completely is subject to tax. This can only be avoided by splitting the pension. The entitlement accrued up to and including 31 December 2016 will then be made non-contributory (no further accrual will take place). The accrual of the pension entitlement after 31 December 2016 will be subject to income tax on an annual basis.
For a pension that is still being accrued under self-administration, the following therefore applies: before 1 January 2017 action will be taken.
Recovery of externally insured capital
Sometimes a pension scheme is partly self-administered and partly held with an external insurer. In such cases, the funds held with the external insurer may be transferred back to self-administration by 1 January 2017.
The Government is not prepared to set a longer deadline for this. It is, however, sufficient that a request has been made to the external insurer before 1 January 2017 to return the capital to the private limited company. The administrative processing and the actual payment of the surrender value of the externally insured pension may then take place in 2017.
Lump-sum settlement
In the NnavV, the Government reiterates that the lump-sum settlement and reduction scheme (in 2017: 34.5%) applies only where the total pension entitlement is settled in a single lump sum. Partial surrender or surrender in stages is not permitted.
Private limited companies (B.V.s) and directors/major shareholders (DGA) who do not have sufficient funds to pay the tax due upon full surrender of the pension must make use of the option to convert the pension entitlement into a retirement benefit obligation.
Pensions in payment
Even if the self-administered pension is already being paid out, it may be surrendered or converted into a retirement obligation under the reduction scheme. Following conversion into a retirement obligation, it must still be paid out over a period of 20 years, minus the number of years that have elapsed since the pensioner reached state pension age.
The NnavV also confirms that the partner of a director and major shareholder (DGA) who is already a pensioner and has passed away may also surrender the self-administered pension.
Underinsurance
Many private limited companies have fewer funds than are required to pay out the pension entitlements insured under their own management. This is referred to as a shortfall in the pension liability. These private limited companies must continue to pay out pensions until all funds have been exhausted. Any remaining pension entitlements at that point are not realisable and, naturally, cannot be taxed.
The Government is not prepared to limit the tax liability associated with the buy-out of a self-administered pension to the amount of the available funds. As a result, in many cases it will not be worthwhile for directors and major shareholders (DGA’s) with an underfunded pension to buy out that pension. The 34.5% discount will then usually not outweigh the fact that, under the regular pension payment scheme, the underfunding is not subject to tax.
Partner
An important point to consider in the phasing out of self-administered pensions is the position of the pensioner’s partner. In the NnavV, the Government states that it is unable to provide examples or a roadmap for this issue. This must be assessed on a case-by-case basis. It is clear, however, that the obligation to compensate the partner rests with the pension beneficiary (the director and major shareholder), not with the private limited company. After all, it is the pension beneficiary who receives the net lump-sum payment from the pension scheme.
Donation
The NnavV addresses situations in which the pension beneficiary does not hold all the shares in the private limited company. In such cases, the surrender of the pension entitlement results in an advantage for the other shareholders. This is because the adjustment of the commercial value of the pension entitlement to its tax value increases the value of the shares. This increase in value is distributed across all outstanding shares. Consequently, it also applies to the shares held by the other shareholders. To the extent that the other shareholders do not compensate the pension-entitled shareholder, this may constitute a taxable gift.
Breakfast meetings or a one-to-one meeting
Would you like to find out more about the phasing out of self-administered pensions? In three breakfast sessions We will discuss all aspects of the bill.
Of course, you can use one of our consultants make an appointment to discuss the implications for your to assess self-administered pension schemes.