Deciding what to do with your pension savings is one of the biggest financial decisions you ever make, because it affects your long-term financial security. The new UK pension rules that came into effect in April give you more choice, but specialist advice is essential.
Deciding what to do with your pension savings is one of the biggest financial decisions you ever make, because it affects your long-term financial security. The new UK pension rules that came into effect in April give you more choice, but specialist advice is essential. This is particularly true for expatriates, as you need to consider the tax rules and implications in your country of residence.
Does the new freedom apply to my funds?
The new rules apply to those aged 55 and over with defined contribution schemes. For example, individual or group personal or stakeholder pensions, Self-Invested Personal Pensions (SIPPs), some Additional Voluntary Contribution (AVC) schemes, Executive Pension Plans (EPPs) and Small Self-Administered schemes (SSASs).
However, not all defined contribution schemes offer the same flexibility and you may want to transfer to a plan that does. This could lead to a loss of guarantees or benefits, so it is essential to explore all your options, and the tax and long-term consequences, before making any decision.
Importantly, the rules do not apply to defined benefit (final salary) schemes, public sector pensions, state pensions or annuities, though there may be greater flexibility for annuities in future.
What are my options under the new rules?
In summary, your options are:
- Take the whole fund out as cash in one go.
- Make withdrawals of any amount as and when you want, leaving the balance invested.
- Take regular income through income drawdown. You draw directly from the pension fund, which remains invested.
- It should be possible to take the 25% tax-free lump sum and take taxable income through income drawdown at a later date. Remember, the lump sum is only tax free in the UK; you need to look at the rules of your country of residence.
- Take a secure regular income through buying an annuity.
If you choose to take all or much of your fund as cash, you should make sure you have a reliable plan for your long-term financial security.
Each pension scheme can decide what they offer members. Some schemes may only make payments of withdrawals to UK bank accounts, which would be a problem for some expatriates.
What if I still want to contribute to my pension?
There are conditions and restrictions on non-UK residents contributing to UK pension schemes. If you are eligible, note that if you are in a new flexi access scheme, contributions will be restricted to £10,000 annually instead of the normal £40,000. There are exceptions and you should always check with an adviser before making any changes.
Tax relief on pension contributions is restricted for those earning over £150,000. The lifetime allowancehas been cut from £1.25 million to £1 million from April 2016. Large penalties arise on the excess when benefits come into payment.
What about the 55% ‘death tax’?
The 55% tax charge has been abolished. If you die after age 75, your beneficiaries will be taxed at their marginal rate of UK tax on benefits drawn, be that a lump sum or income. This also applies to annuities but not final salary schemes.
What if have a defined benefit pension?
If you have a defined benefit (final salary) scheme and want to take advantage of the new rules, you have to transfer to a defined contribution scheme. You could lose valuable benefits so it is essential you consider it carefully. Transfers over £30,000 require you to take advice from a pension transfer specialist regulated by the UK Financial Conduct Authority.
What about QROPS?
Many Qualifying Recognised Overseas Pension Scheme (QROPS) cannot yet provide full flexibility on withdrawals and only certain providers accept non-UK residents, so choices are limited. Also, the rule where 70% of the transfer value made to a QROPS must provide an income for life currently remains in place for non-EU QROPS.
What about tax?
UK taxpayers receive 25% tax free, with other income/withdrawals taxed at their marginal rate of income tax. It is essential for expatriates to consider the local tax implications for their pension options.
Should I be careful of scams?
The new rules provide new opportunities for retirees but also for fraudsters. Pension companies warn of a significant trend for transfer requests to schemes that, on investigation, turn out to be scams. Always take regulated advice to protect yourself.
This is a complex area and getting it wrong can have serious consequences. Always seek specialist advice that is tailored to your specific needs.
Any questions? Ask our financial advisers for help.
(updated November 2016)
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 is advised to seek personalised advice.