Retirement Annuity Trust Schemes (RATS)
Top 5 Tips
- Make sure you understand who is responsible for what in relation to the RATS.
- Identify all the costs involved, not only those to set up the RATS but also on-going costs, to ensure the proposed scheme is cost effective.
- Make sure you clearly identify to the trustees any persons you wish to benefit from your RATS should you die whilst your RATS is in existence.
- Remember that the value of investments can go down as well as up. This means that the value of your RATS could fall. You need to be clear on whose responsibility it is to monitor your investments and take investment decisions.
- If you are considering the transfer of an existing pension funds to a RATS, ensure that the potential benefits of this transfer outweigh the loss of any advantages offered by an existing scheme.
What is a RATS?
A RATS is a type of personal pension scheme, where the pension funds are held in trust and invested on your behalf by a Trustee.
There are two types of RATS – a personal (individual or bespoke) RATS which can be tailored to meet your needs and a multi-member RATS which may already be in existence where you can be added as a member of the RATS.
A RACS (Retirement Annuity Contract Scheme) operates in a similar manner however the money is held under a contract as opposed to being held in a trust.
Other than approved occupational pension schemes, RATS or RACS are generally the only kind of personal pension available to Guernsey residents.
As a type of pension scheme a RATS or a RACS is a method of saving money which will then be used to pay you an income in retirement. While some RATS or RACS may offer various other features, it is important to remember that their purpose is to facilitate saving to help fund retirement.
All RATS and RACS must be approved by the Director of Income Tax.
How do they work?
If you choose to set up a personal RATS, a Trust will be created for you. If you join a multi-member RATS, typically you will be provided with an agreement containing relevant extracts of the Trust Deed.
It is likely that you will be asked to sign a Trust Deed as part of setting up your personal RATS. This is an important document that sets out the Trustee’s responsibilities to you, and the basis on which they will look after your money. The Trustee or your financial adviser should explain the content and significance of the deed or agreement.
The Trustee of the Trust will be responsible for looking after the money you pay in to your RATS on your behalf. In most cases a financial adviser, either chosen by you or appointed by the trustee, will advise you and the Trustee on how best to invest the money you pay into the RATS.
In addition to making regular contributions to your RATS you can also transfer in existing pension funds. While this should not result in any tax problems there are other issues you should consider, which are detailed below.
For more information on saving for a pension, visit the States of Guernsey website.
The Trustees will normally provide you with a statement on an annual basis for your RATS, which will identify contributions that you make, fees and any other charges and the value of the investments within your RATS.
Should you get advice?
RATS, and the various decisions you will need to make when setting one up, can be complex. If you do not feel confident making those decisions by yourself you may benefit from speaking to a financial adviser. More information about financial advice can be found on the Commission's 'Things to Consider Before getting Financial Advice' page.
Things to be aware of
- Taking a loan from your RATS
- Drawing money from your RATS
- Transferring other pensions into a RATS
- Investment Risk
- Setting up a RATS yourself
It is important that you understand the various costs and fees, both initial and ongoing, that you will need to pay to set up and run a RATS. The fees will generally be taken from the money within the RATS itself and may include;
Trustee Fee - The Trustee of the RATS will charge either a fixed fee or a percentage of the value of the RATS each year to act as Trustee and administer the RATS. They may also charge additional fees to perform certain services such as arranging a loan from the RATS, starting to make income payments or transferring the RATS to another Trustee. They may, in some cases, charge on an hourly, time spent basis.
Financial Adviser - If you received advice on whether to set up a RATS, or how to invest the money within your RATS, the adviser will charge either a fixed fee or a percentage of the value of your RATS or the investments they advised you on. If they provide ongoing services, such as monitoring the performance of your investments and/or conducting annual reviews, it is likely that they will charge a fee, usually a percentage of the value of your RATS, each year.
Investment Manager - An investment manager may be appointed to take investments decisions. Their fee is likely to be charged as a percentage of the value under their control.
Investment Platform - Your money may be invested through an investment platform. They often provide access to a wide range of different funds and usually reduce the initial and ongoing costs of investing in those funds. Investment platforms will charge a small annual fee based on a percentage of the value of your investments for this.
Fund Manager - The managers of the funds that your RATS has invested in will charge a percentage of the value of the investment each year. This is usually called an annual management charge.
Commissions - Fund managers may pay commissions (sometimes known as ‘retrocessions’) to your financial adviser or trustee. These do not represent additional costs for you as they are paid out of the annual management charge the fund manager takes, but they are something you should be aware of.
These costs, particularly any recurring costs, can have a serious effect on the growth of your RATS. Your trustee or financial adviser should make clear how much the RATS will cost, and the effect the costs will have on the value of the RATS.
Multi-member RATS are normally less expensive than a personal RATS.
Make sure you understand what all the costs and fees associated with the RATS are for and that the services or benefits you receive for them are worthwhile.
Taking a loan from your RATS
Many RATS allow you to take a loan which will be up to a maximum percentage of the value of the funds. This loan must be on commercial terms, which means that there will be interest charged on the loan at a similar rate to other loan providers. However, the interest will be paid to the RATS itself, of which you are the beneficiary. Some Trustees may require you to take out some form of security if you take a loan from your RATS, but this will depend on the sum involved, and the terms on which it is borrowed.
Further details on the amount that can be loaned is available on the Income Tax website. This can be found in section 9 of their 'Requirements for Approved Retirement Annuity Trust Schemes and Approved Retirement Annuity Schemes' document.
Drawing money from your RATS
If you wish, you are able to take a lump sum of up to 30% of the value of the RATS from age 50. You would not need to start taking any income from the RATS at the same time if you did not require it. However you must start to take a benefit by the age of 75.
Transferring other pensions into a RATS
It is possible to transfer most existing personal pensions you have into a RATS. Some personal pensions have valuable benefits, such as a guaranteed growth rate, or a guaranteed annuity rate. These benefits would be lost if the money in those pension schemes were transferred into a RATS. It is important to be sure that potential benefits of a RATS outweigh the loss of the advantages offered by an existing pension scheme.
The ability to take a loan from your pension funds may sound appealing, but there may be other methods of securing funds or achieving your objectives, without transferring your pension into a RATS solely to access part of it immediately. Compare the cost of other alternatives before making this decision.
This is especially important if you have a final salary pension (also known as a Defined Benefit pension). This type of pension will pay you a defined amount each year in retirement, and is usually based on the salary you were receiving when you left employment. The amount you receive often increases each year with inflation.
It is often difficult for a RATS to provide the same level of income as could be achieved from a defined benefit scheme in retirement without making higher risk investments. If the value of your defined benefit scheme exceeds £30,000, the Trustee or financial adviser will provide you with a report setting out the investment return your RATS would need to generate in order to match the income your existing pension would provide.
It is very important you understand the amount of investment risk you would need to take to achieve that level of return. Your investment adviser should help you with this.
The money you pay into your RATS will be invested by the Trustee, often with the assistance of a financial adviser or investment manager, in order to increase its value over the long term, so the RATS is able to provide you with a larger pension in retirement.
However, it is important to remember that the value of investments can go down as well as up.
In most cases you will need to decide how much investment risk you are willing and able to take with the money in your RATS. A higher level of investment risk means that the value of your investments are more likely to change, and to change by a larger amount, when compared to a lower level of investment risk.This means that higher risk investments are more likely to increase in value compared to lower risk investments but are also more likely to go down in value. This propensity to change in value is often referred to as volatility.
Your financial adviser or RATS provider should help you assess the level of risk you are willing and able to take with the money in your RATS. They should also help you understand the potential consequences of this decision. It is important that you make sure you understand the consequences of the level of risk you are taking and are comfortable with it.
Over the longer term, investments are more likely to provide a positive return.
You should have some idea of the kind of return you might get, or a target return in mind, as this will impact on your ability to meet your retirement goals but be aware that returns are usually not guaranteed.
Setting up a RATS yourself
It is possible to have a RATS without using professionals to act as the trustees of the RATS but again this will need to be approved by the Director of Income Tax.
Neither members of RATS, nor their relatives, can be trustees of the Scheme, unless the deed establishing the RATS specifically enables the trustees to act by majority and the majority of those trustees are neither members of the Scheme nor their relatives.
You will need to consider if those acting as the trustees in this case have the ability to fulfil the requirements set by Income Tax in relation to the RATS.
The Income Tax Office has published a Code of Practice in relation to RATS which is available from the link below.
States of Guernsey Income Tax website Tax on Pensions summarises the main facts and features of a pension and how they relate to taxation.
In addition to contact details for the Income Tax Office, this website page also has links to documents providing further detailed information and definitions on: