EFRBS: attractive alternative for high earners?

6 April 2006 saw the introduction of the Employer Financed Retirement Benefit Scheme (EFRBS), replacing the now defunct Funded Unapproved Retirement Benefit Scheme. An EFRBS is an unregistered (ie not registered with HM Revenue & Customs) pension scheme commonly used to provide retirement benefits to high-net-worth individuals (defined as those earning over £150,000 per annum for the purposes of this article). It is commonly used as a retirement vehicle to incentivise and reward key employees, directors or shareholders.

The employer will usually establish a trust that has the purpose and power to enable the employer to provide retirement benefits to employees. Employees cannot make contributions to the EFRBS. There are two types of EFRBS: a funded EFRBS and an unfunded EFRBS.

Types of EFRBS

Funded EFRBS

The employer will contribute funds to the trust in advance of the employees’ retirement. These funds are then allocated for the benefit of those employees. The EFRBS can invest this money, as the trustees see fit, in a wide range of assets. It provides a way to ring-fence money and assets in a separate fund away from the company so that such money is not vulnerable to downturns in the employer.

Unfunded EFRBS

In an unfunded EFRBS the employer will not make any contributions in advance of retirement. The employer will only contribute to the EFRBS during the retirement of the employee. Unfunded EFRBS may also be set up under trust. However, if the trust is established for this purpose the employer may have to make a nominal contribution to the trust. It is possible for the unfunded element of the pension to be secured by a third party and/or the employer to resolve any doubts the employee may have regarding the availability of funds at the time of their retirement.

How an EFRBS benefits from being unregistered

An EFRBS, being an unregistered arrangement, is not subject to the restrictions placed on registered pension schemes and as such is a more flexible investment vehicle. For example:

  1. Unregistered pension schemes benefit from less restrictive investment opportunities than registered pension schemes. EFRBS may invest in stocks, shares, commercial property, residential property, cash deposits, fixed interest investments, equities, derivatives, unit trusts and investment trusts.
  2. An EFRBS can lend and borrow money, invest in unquoted companies and effect transactions with connected parties, for example scheme members or the employer, as long as these transactions are on a commercial basis.
  3. There is no requirement for an EFRBS to set a specific retirement age (although after 6 April 2010, benefits can only be taken from age 55 onwards).
  4. Contributions made to an EFRBS are not subject to either the annual allowance or the lifetime allowance; the annual allowance (currently £245,000 and rising to £255,000 for the 2010/11 tax year) being the annual limit on tax-free pension savings and the lifetime allowance (£1.75m for the current tax year, rising to £1.8m for the 2010/11 tax year) being the total value of an employee’s pension in all registered schemes they may build up without paying extra tax.



The tax implications associated with payments made to individuals under an EFRBS will be dictated by the nature of such payment. This article outlines the key tax considerations for employers and employees.

Corporation tax

The employer will not be entitled to a corporate tax deduction until ‘qualifying benefits’ are paid out of the EFRBS. Qualifying benefits are provided where there is a payment of money or transfer of assets otherwise than by a loan and include pensions, annuities, lump sums or other payments out of the EFRBS.

Income tax and national insurance contributions (NICs)

Where the statutory conditions are met, there would be no income tax liability or NICs for any individual when the company contributes funds into an EFRBS. The employers contributions into an EFRBS will not be subject to income tax in the employees’ hands, until a qualifying benefit is paid out of the EFRBS.

The payments of qualifying benefits out or under an EFRBS are not subject to NICs provided that they could have been paid under a registered pension plan. In circumstances where the employment relationship between the employer and employee has ceased, there should not be any NICs charge on the benefits paid from an EFRBS, provided that the benefits are within the limits of benefits that can be paid under a registered scheme. Registered pension schemes may only pay a tax-free lump sum retirement benefit of up to a maximum of 25% of the value of the scheme benefits. Therefore, in order to avoid any NICs charge from arising, the lump sum must not exceed 25% of the fund.

Relevant benefits and other benefits paid out of the EFRBS will, if the beneficiary is UK tax resident, be subject to UK income tax at the appropriate rates at that time, taking into consideration the individual’s level of taxable income. The payment of an annuity or pension will be taxable as pension income.

Inheritance tax (IHT)

There is no IHT on the creation of an EFRBS or on the death of a member and the funds held within the EFRBS should not be included in any of the beneficiaries’ estates for IHT purposes.

Depending on the particular circumstances of the EFRBS, IHT charges may apply on the value of the fund on each tenth anniversary of the establishment of the EFRBS. The maximum rate of charge on a ten-year anniversary is 6% of the value of the assets.

Specific benefits for high earners

Contributions to EFRBS are not caught by the new pension rules (brought in by the Budget 2009) that can trigger a tax charge on individuals in respect of contributions made by the company. Accordingly, high earners are able to avoid the 30% pension input tax charge that is generally applicable in respect of employer contributions to registered schemes made on their behalf by having the employer contribute to an EFRBS.

In addition, if an employee has, or is likely by retirement to have, benefits that exceed the lifetime allowance, an unfunded EFRBS may be a viable option for providing retirement benefits in excess of the lifetime allowance. The rate of tax payable on benefits paid under the EFRBS (currently 40% and rising to 50% for the 2010/11 year) is less than the penal 55% tax that is payable on lump sums in excess of the lifetime allowance payable from a registered scheme.


An EFRBS can provide a viable means by which an employer can motivate key high earners in its business, or make tax-efficient loans to itself or its employees, without incurring any NICs on its contributions. High earners can receive their incentives or rewards on retirement while avoiding the 30% pension input tax charge that they face in respect of contributions to registered pension schemes. Given the savings that can be made through this form of pension scheme it is unsurprising that the EFRBS is becoming an increasingly popular option for the provision of benefits for high earners.