Share Schemes supplemet 2004: Stakeholder – Bearing transfers in mind

Very few of us would turn down the opportunity to cut our tax bills. This year’s Finance Bill gave employees the opportunity to do just that with a clause entitled the “Transfer of certain shares to be treated as payment of contribution”.

Put simply, this means that, from April 2006, employers can make provisions for staff to transfer shares from an Inland Revenue-approved share plan into a stakeholder pension scheme. And in doing so, employees will qualify for ‘double’ tax-relief. As well as benefiting from share schemes’ tax-free status, the market value of the shares will be treated as deductible pension contributions from employees’ taxable earnings. Organisations, meanwhile, do not incur tax deductions on any increases in share price when the shares are exercised.

Providing that they are in an approved share scheme and registered pension plan, all staff will be eligible to make the transfer. However, they must ensure that this is completed within 90 days of taking the shares out of the previous scheme. Transfers are also currently restricted to a £3,600 annual limit. While employees have been able to make similar transfers into personal pension plans for a number of years, this is the first time that they have been able to do so into employer-provided schemes.

But industry experts predict organisations may be initially hesitant. Malcolm Cuthbert, director of corporate services and pensions at share scheme providers Killik, believes the nature of stakeholder pensions could limit the number of staff who are able to utilise these tax breaks. “There are complications with this. Members of an occupational pension scheme can’t contribute to [a stakeholder plan] unless they earn less than £30,000 [a year],” he explains.

Rosalind Knowles, a consultant at law firm Linklaters, adds that the benefits of allowing staff to transfer shares into a stakeholder pension, or even that it is possible for them to do so, may pass some employers by. Others will prefer to wait to see how the practice works in similar organisations before jumping onboard themselves.

Encouraging employees to top up their pensions with shares in their employer, meanwhile, is a road that some organisations may be reluctant to go down. Restrictions on occupational pension schemes’ capacity to hold employer-related investments, for example, may lead schemes’ trustees to veto the idea. Should employers wish to go ahead, however, this is one way that enables firms to invest its own shares in its pension scheme.

Of course, organisations that don’t offer an approved share plan or pension scheme would also need to establish these before staff could take up any additional benefits.

For employers that decide to introduce this provision, good communication is vital. Once employees have transferred shares into a stakeholder scheme, these will be treated like any other pension contribution. Employers, therefore, must ensure that staff fully understand the principle before they make the move. Linklater’s Knowles explains: “The biggest thing to bear in mind is member communication. Make sure that people understand what they are doing and that once [the shares] go into the stakeholder scheme, they won’t have access to them until they retire.”

Whether or not the ruling will prompt employers to offer this option to staff, however, remains to be seen. As Nick Wallis, corporate tax director and head of share plans at Smith & Williamson, explains, the ruling comes with a both pros and cons. “It’s a very good idea for staff. If they [transfer] shares, they will continue to grow in a tax-free environment. The question for an employee [to ask] is: how much do you want to be invested in your employer?”

What you need to know
• From April 2006, employees will be able to transfer shares from an Inland Revenue-approved share scheme into a registered stakeholder pension scheme.
• Doing so will qualify staff for ‘double’ tax-relief, because the market value of the shares will be treated as deductible pension contributions.
• This is the first time individuals have been able to transfer shares into employer-provided pension schemes, although they have been able to do so into personal plans for some years.
• Good communication is essential to ensure that staff understand how the process works.