From 1 April 2017, if you are a director and major shareholder with a self-administered pension, you may choose to convert that entitlement into a retirement liability (ODV).
Retirement liability
The basis for the retirement liability is the tax value of the self-administered pension at the time of conversion. You are free to choose that date, but it must be before 1 January 2020. Many directors and major shareholders have, for the time being, opted to defer the conversion until the end of 2019.
Your pension provider must agree to the transfer, and you must complete the transfer within one month by means of a little phrase report this to the tax authorities. Naturally, you must set out the terms of the ODV in a written agreement with the private limited company.
Novelty
The retirement liability is a new development in tax legislation. The legislator does not seem to have given the matter much thought (as yet), or is assuming that any problems will be resolved in practice. In the meantime, the Central Point of Contact for Pensions (CAP) has therefore published a large number of guidance documents on the ODV. These set out the Tax and Customs Administration’s view of the issue.
Civil law
The ODV is regulated by tax legislation. How it should be dealt with under civil law was hardly considered at all when the legislation was drafted. For example, how does an ODV work if the director and major shareholder dies?
Tax rules stipulate that the ODV must then be paid out to the heirs of the director and major shareholder. Provided they are natural persons. If not, the ODV is bought out. The value of the ODV at that time is then subject to payroll tax or income tax.
However, as the successor to the director-owner’s pension, the ODV is, of course, intended as an income provision for the director-owner and their partner in their old age. But that is not always where the payments end up. Under inheritance law, the retirement obligation is, after all, a right to a claim. And this is inherited in accordance with the provisions of the director-major shareholder’s will (or, in the absence of a will, in accordance with statutory inheritance law).
Opinion
Directors and major shareholders with a retirement benefit obligation would be well advised to check – or have someone check – whether, following their death, the payments will go to the intended person or persons. If not, the will will probably need to be amended accordingly. The inheritance of the retirement benefit cannot be arranged in the agreement setting out the terms and conditions of the retirement benefit.