If you have UK pension funds you can start to draw income from age 55, a regime now known as ?drawdown pensions?. The alternative is to buy an annuity. Drawdown provides an ability
If you have UK pension funds you can start to draw income from age 55, a regime now known as ?drawdown pensions?. The alternative is to buy an annuity. Drawdown provides an ability to take income from the underlying investments, allowing personal investment control of the funds and flexibility of the income drawn. There are now two options for drawing your pension: ?Capped Drawdown? and ?Flexible Drawdown?.
Capped drawdown
This is the standard drawdown arrangement for most people. Within HM Revenue & Customs limits, you choose the frequency and amount of income you draw during the year. The level of income you can take is based on Government Actuary?s Department (GAD) figures, which are influenced by age, gender and 15 year gilt yields. The minimum and maximum income is 0% and 100% of GAD, and will usually be reviewed every three years. While you can take up to 100% of GAD, you should take inflation, longevity and medical/long-term care costs into consideration.
You can alter the income any time within the limits or stop taking it.
Flexible drawdown
There is no limit to the amount of income you can draw each year – you can even take the entire fund out as a lump sum. However flexible drawdown is an option that must be carefully considered.
To opt for flexible drawdown you must meet the minimum income requirement (MIR), currently ?20,000. You will also have to stop all pension provision in that year.
To meet the MIR you must have a secure pension income of at least ?20,000 in payment in the year you elect for flexible drawdown. The income can come from state pensions; lifetime annuities; some (but not all) scheme pensions from registered pension schemes; secure pensions from overseas schemes and top up payments from the Financial Assistance Scheme. The following do not count towards the MIR: income drawdown pensions; pension income non-registered schemes; purchased life annuities; drawdown payments and overseas pensions equivalent to drawdown (QROPS and QNUPS).
Importantly, the MIR cannot be met by non-pension income. So even if you have, say, ?3 million worth of investments which provide you with a generous income, this will not count towards the MIR.
Once you are in flexible drawdown you cannot make any more tax relievable contributions to any pension scheme and cannot remain an active member of a defined benefit scheme. It is however possible to restart pension funding in subsequent tax years but without the benefit of an annual allowance or tax relief.
Besides the above constraints there are also tax considerations. While flexible drawdown may appear to be an attractive new option, it is actually a way for the UK government to earn more tax revenue. UK tax residents receive the 25% tax free lump sum, but the rest of the income is fully taxed.
The situation is even worse for Spanish residents because there is no 25% tax free lump sum, so taking your entire fund as a lump sum could generate a substantial tax bill.
The lump sum would be liable to income tax up to a top rate of 43% (47% in Andalucia and 49% in Catalu?). If you invest the released funds you will be liable to Spanish taxes on any income and gains. You will also have brought money into Spanish succession tax and possibly UK inheritance tax on your death.
There is a further tax consideration: if you return to the UK within five years of leaving you will have to pay income tax on the total amount of withdrawals made while in Spain the year you return, at your highest marginal rate. This would be in addition to the tax paid in Spain, with no credit allowed for it. Bear in mind that while you may have no intention of returning to the UK at the moment, circumstances can suddenly and unexpectedly change.
All in all you need to carefully weigh all the pros and cons before taking flexible drawdown.
Death benefits
The same death benefit rules apply to capped and flexible drawdown. Any remaining funds can be paid to your dependants, though lump sums will be paid less a 55% tax charge.
QROPS
If you are looking for increased flexibility over capped drawdown, moving your pensions into a QROPS (Qualifying Recognised Overseas Pension Scheme) may give you increased flexibility over the amount you can draw down.
Income, including lump sums, from a QROPS can also be taxed very favourably in Spain and lump sums paid out on death escape the 55% tax charge provided you have been non-UK resident for five complete and consecutive tax years.
An experienced wealth manager like Blevins Franks will talk you though all your options and help you determine your best course of action.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
By David Franks, Chief Executive, Blevins Franks
23rd September 2011
