Back in July last year the UK Treasury published a consultation paper on reforming the UK pension system with the aim of abolishing the annuity deadline. The 2011 Finance Bill draft legislation p
Back in July last year the UK Treasury published a consultation paper on reforming the UK pension system with the aim of abolishing the annuity deadline. The 2011 Finance Bill draft legislation published in December confirmed the proposals, but we had to wait until the Budget on 23rd March 2011 for the Treasury to give the green light to the reforms – not a moment too soon since the start date was 6th April 2011. Pension companies had however correctly assumed there would be no surprises and worked ahead on system updates.
So, within the UK framework, there is now absolutely no requirement to buy an annuity and you are no longer penalised if you choose not to. We now have one regime for all ages, with the result that those aged 75 or over have a more beneficial regime than previously, but those under 75 now have lower income limits and higher death charges.
Here is a summary of the new regime which came into effect on 6th April 2011 and also applies to expatriates with UK pensions. It affects people already in drawdown as well as those who have not yet vested their pension.
? Under the old system, before your 75th birthday (increased to 77 in June), you had to choose between buying an annuity or moving into an Alternatively Secured Pension (ASP) where charges on death were 70% or 82%. Today ASPs no longer exist. You can either leave your fund invested for the rest of your life or choose to buy an annuity at any age.
? Most people will move into ?capped drawdown? when they vest their pension. The income limits are set by the Government Actuaries Department (GAD) and while previously the limit was 120% for those under 75 and 90% for those over 75, it is now 100% for all ages. Older people can potentially receive a higher income than they could before, but younger ones see their income potential fall by around 17%. The minimum withdrawal is zero. For those already in drawdown there are rules covering when they move to the new basis.
? The government has primarily limited the maximum so as to reduce the number of funds being depleted by regular excessive withdrawals. It is not usually advisable to continually take the maximum income, but this obviously depends on your individual circumstance. Depending on how long you have been a non UK resident you may be able to receive a higher income than permitted by GAD and you could therefore talk to an adviser like Blevins Franks to discuss the possibility and suitability of moving your pensions into a QROPS (Qualifying Recognised Overseas Pension Scheme).
? On death after starting drawdown there is now a tax designed to recover past tax relief. This is at a fixed rate of 55%, which is a significant tax increase for those under 75 as their previous rate was 35%. For those over 75 it is a very welcome improvement on 82%. This 55% is seen as penal given most people will have had tax relief on most of their contributions at no more than 40%. Expatriates may be able to move their private pensions into a QROPS and if they then have been non-UK resident for five full and consecutive UK tax years on death their fund will escape this UK charge.
? Residual pension assets on death are not additionally subject to inheritance tax (but if there are schemes set up that abuse this the Treasury will clamp down).
? The 75 age limit at which you can take your pension commencement lump sum has been removed.
? As with the old legislation, no further contributions can be made after age 75.
? The latest age for lifetime allowance test also remains 75. The allowance will be reduced from ?1.8 million to ?1.5 million from 6th April 2012. If you have pension savings over ?1.5 million you have one year to take action to protect your fund from higher taxation.
While these proposals affect UK pension schemes, not all QROPS will automatically follow suit. If you have a QROPS, or are thinking of moving into one, you need to discuss the situation with your adviser and/or QROPS provider.
Since UK pensions are regulated by the UK Financial Services Authority you should only take advice from a firm which is authorised by the FSA for the conduct of pension and investment business, such as Blevins Franks Financial Management Ltd. The same applies if you wish to explore the advantages and options for transferring your pension funds into a QROPS if you an expatriate.
By David Franks, Chief Executive, Blevins Franks
6th April 2011
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.