On 6th April this year new regulations for UK pensions come into effect. All UK pension holders will be affected, including expatriates. While the increased flexibility is very welcome, millions
On 6th April this year new regulations for UK pensions come into effect. All UK pension holders will be affected, including expatriates. While the increased flexibility is very welcome, millions will start to receive a lower income and see the death charges on the balance of their funds jump from 35% to 55%.
The 2011 Finance Bill draft legislation was published in December and included confirmation of the Treasury?s pension proposals announced in July.
Annuities and drawdown
Under current legislation you can only postpone drawing your pension until age 75 (increased to 77 last June). Before turning 77 you have to either buy an annuity or transfer into an Alternatively Secured Pension (ASP). Annuity rates have been low for a while and you cannot pass on any balance to your heirs (other than a spouse?s or dependant?s pension). ASPs provide a lower level of income than drawdown and any balance left to your heirs would suffer an 82% tax charge.
Starting 6th April 2011 ASPs are scrapped and you can postpone drawing your pension indefinitely – there is no age limit to annuitise. You can buy an annuity at any time or not buy one at all, so you can remain invested in the stockmarket as long as you wish.
Once you decide to vest your pension, you will use your fund (after any cash lump sum has been taken) to set up a drawdown plan. For the majority of people this will be ?Capped Drawdown?, where your minimum income is determined by the Government Actuaries Department (GAD). While the maximum is currently 120% of GAD, from April it is reduced to 100%… so your pension income could fall by almost 17%.
An alternate system of ?Flexible Drawdown?, where there is no limit on the amount of income you can withdraw, is available for those who qualify. To be eligible you must meet the minimum income requirement (MIR) of secured lifetime pension income, which has been set at ?20,000.
The MIR can only consist of pension income, i.e. from state pensions, scheme pensions (i.e. final salary schemes) and annuities. It does not include drawdown income or income from QROPS. If you have significant investments elsewhere which provide a healthy annual income, these will not count.
Note that if you opt for flexible drawdown you will not be able to obtain tax relief on any further pension contributions.
The significant downside of these new rules is that the death charge on the balance of your fund rises from 35% to 55%. After the consultation had been published there had been calls for the government to lower this ?penal? tax rate, but it remained 55%. While it is an improvement for the 82% rate for those over 75/77, millions of people will see the tax charge on death on their pension funds rise by 57%. Your heirs will receive less than half of your pension fund.
If you never take withdrawals or a lump sum before age 75 the whole fund can pass to your heirs as a tax free lump sum (providing you are under the lifetime allowance). After 75 it will be taxed at 55%.
The government has been criticized by many in the pensions industry for the new 55% tax, with the marketing director of SIPP provider A J Bell saying that ?the government is using the positive story about greater flexibility at 75 as a Trojan horse to introduce a tax rise for a vastly greater proportion of the population than are going to benefit from this change?.
Expatriates may be able to avoid this UK death charge completely by moving their private pensions into a QROPS (Qualifying Recognised Overseas Pension Scheme). Once they have been non-UK resident for five full consecutive UK tax years, their QROPS will no longer be subject to this tax.
For expatriates in countries like Spain, France and Portugal a QROPS also provides tax savings during your lifetime as taxation of withdrawals is usually more beneficial than if you keep a UK pension fund.
A QROPS can also provide increased investment and income flexibility and can be set up in Euros to avoid exchange rate risk.
Tax free lump sum
Currently you can only take your 25% pension commencement lump sum (PCLS) up to age 75. From 6th April there is no age limit. The Treasury is still consulting on whether to allow PCLS before age 55, which would be a significant change.
The Treasury has also confirmed that from April pension drawdown funds will not be subject to inheritance tax (IHT), provided it is a registered scheme and the trustees retain discretion over the ultimate choice of beneficiary. Previously, if you have not bought an annuity IHT is applied to any unused part of your funds.
The new rules mean that if a member chooses not to take their retirement entitlements from a registered pension scheme or a Qualifying Non-UK Pension Scheme (QNUPS) they will no longer face any IHT anti avoidance charge.
With professional advice you may be able to use pension funds as an estate planning tool.
Pension savers currently have a lifetime allowance of ?1.8 million. The Treasury has confirmed that the limit will be reduced to ?1.5 million, starting April 2012.
If you have savings of over ?1.5 million or if you believe the value of your pension pot will increase above this level through investment growth (i.e. not with further contributions) you can apply to HM Revenue & Customs for a temporary allowance of ?1.8 million.
QROPS providers still need to establish whether they will follow the UK to the letter with regards the above changes as their interpretation may differ from the UK.
It is important to take professional advice on your UK pensions, whether it is regarding your new drawdown options or if you are considering transferring into a QROPS. Transfers are heavily regulated by the UK Financial Services Authority so you should only take advice from a wealth manager who is authorised and regulated by the FSA for the conduct of pensions and investment business, such as Blevins Franks Financial Management Ltd.
By David Franks, Chief Executive, Blevins Franks
10th January 2010