Retirement Annuity Trust Scheme (RATS) – what you need to know
Firstly, when should you consider a pension?
Few of us prioritise pensions early in life but the reality is that the later you leave creating a pension, the more you will need to contribute to ensure that you have enough income on retirement. Starting a pension at 25 could create retirement income of double that of someone who starts saving at 40. RATS are a suitable and attractive pension for Guernsey residents.
Individuals have two ways to establish a RATS
RATS can be setup in two ways: bespoke RATS and multi member RATS. A bespoke RATS may be best for anyone with a pension of £150k+ while a multi member RATS is designed for smaller pension funds. The main differences between the two are how the scheme is structured, the amounts involved, and investment flexibility required. A multi member RATS is an existing scheme to which you can be added as a member and is well suited for startups and those with small sums to invest. The bespoke RATS involves a trust being newly created specifically for an individual or family and is more suitable to handling more significant sums or those requiring a wider range of investment options. With both types, a trustee will be responsible for looking after the money that is paid in.
Transfers and investments
Evidence may be required of approval from an authority in a transferring jurisdiction but, other than that, it’s very straightforward to make a transfer from an existing pension into a RATS. One of the main attractions of RATS is the wider range of investment options RATS offers, as compared to a conventional insurance, based pension scheme. The old style pensions offer a very restricted, and often expensive limited range of funds. RATS on the other hand can offer a full range of investments including, for example bonds, equities, funds as well as holding shares in unquoted companies, property and more esoteric investments. With a RATS it’s also possible to access investments that might usually be beyond reach due to high minimums.
Other benefits of a RATS
- RATS loans. RATS members have the option of taking a loan with a value of up to 30% of the pension value, offered at commercial rates. Insurance based pensions do not allow loans.
- RATS tax relief. Pension contributions, such as those paid into a RATS, benefit from tax relief, which will reduce your total annual tax liability. If you don’t use this tax relief in the year it is generated it can be carried forward for up to six years.
- The lump sum. Any time after the age of 50 RATS members can draw a lump sum of up to 30% of the fund value, up to a limit. This is tax free and available even where pension contributions are not yet being drawn and when you’re still working.
- A RATS is flexible. It’s not necessary to purchase an annuity and there is no minimum contribution or maximum investment. Contributions can be changed or stopped at any time.
- Inheritance. If you die without drawing anything from the scheme, it’s possible to distribute the whole fund without attracting an income tax charge.
Whether you opt for a bespoke RATS or a multi member RATS, when it comes to Guernsey pensions, the RATS is ideal for tax efficient pension provision.
