Authorised pension scheme holds investments in pension funds. It seems strange to me that a pension scheme would itself invest in pension funds, and I am failing to see what the benefit is (either tax or otherwise) of investing in pension wrapped products - it seems like potentially there could be a disadvantage - ie the fees and returns on the underlying pension funds reflect the tax advantages offered, yet the investor (the authorised pension scheme) already benefits from these tax advantages? Am I missing something and / or has anyone else seen this type of set up before?
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Are you sure ...
that's what's happening?
I can't see how the trustees of the "investee" scheme could be acting as fund manager for a separate scheme. That would seem to go way beyond the likely establishing trust deed - if not pensions law more generally.
There are common investment arrangements for some large empoyers' schemes that, for whatever reasons, are unable to be merged. That's not the same as one pension scheme investing in another.
Whether there are disadvantages depends would require a detailed analysis. There might, for example, be some savings in 'bulk discounts' with third party service providers.
The "investee" scheme would be taxed on charges it levies for the provision of investment management services. That kind of income would not, as far as I can see, be within the tax reliefs available.
I would check the status of the destination again.
Because your client looks like a small pension fund, ordinarily they wouldn't be able to take advantage of economies of scale. i.e. all their investments would ordinarily be at retail management fee rates.
There are 'wrap' or 'fund of funds' set ups out there that take money from small pension funds or even investment funds, pool them together in order to gain these efficiencies and lower the management fee charged on those funds ... whilst charging their own management fee, of course!
However, the combination of the two can often be lower than the pension funds going directly into managed funds with its limited resources on its own.