The UK Pension Reforms

On 6th April 2011 new rules were introduced which affect the way you take retirement income from your UK pension funds. The rules apply regardless of your country of residence when taking your pe

On 6th April 2011 new rules were introduced which affect the way you take retirement income from your UK pension funds. The rules apply regardless of your country of residence when taking your pension.

There is no longer an age limit to buy an annuity and no tax disadvantages if you never buy one at all. You can now leave your fund invested right through your retirement if you wish.

Alternatively secured pensions (ASPs) have been scrapped.

The age limits for drawing an income and taking a pension commencement lump sum have also been removed, though when you start to draw income the lump sum must be drawn at the same time (you will not have another opportunity).

When it comes to taking an income, most people will move into the new ?capped drawdown?. Subject to a set limit you can choose how much to draw down annually and the minimum can be zero. The limit is still set by the Government Actuaries Department (GAD), but the maximum is now 100% (down from 120% for those under 75, up from 90% for those over 75). Income levels will be reviewed every three years and every year after age 75.

Some pension providers may offer the ?flexible drawdown? option, where there is no limit on the amount of income you can withdraw (you can even take out the whole fund, less tax). This is only available to individuals who can meet a minimum income requirement (MIR) of ?20,000 per annum, which can only be made up of secure pension income – any other income does not count.

Once you have vested your pension, any lump sum paid to your beneficiaries will be subject to death taxes (a ?recovery charge?) of 55% – an increase from the previous 35%. If you have not vested your pension the charge will only apply if you are over 75 on death.

UK inheritance tax will not typically apply to drawdown funds, regardless of age. There are no longer any anti-avoidance rules for those who do not take pension benefits.

As before, all benefits are tested against the lifetime allowance. If you do not vest your pension by age 75, the lifetime allowance test will take place anyway.

QROPS

Qualifying Recognised Overseas Pension Schemes continue to look attractive for expatriates who have pension funds totaling over ?100,000. Here are some of the benefits.

? Exemption from all UK taxes on death if you have been non UK resident for the previous five consecutive UK tax years ? i.e. a potential saving of 55%, so you can pass a much larger fund on to your loved ones.

? Greater flexibility on drawing benefits and greater discretion over investment choice compared to UK approved pension schemes, with wide ranging investment options. This helps you structure your fund for your expatriate lifestyle and currency and inflation situation.

? Your fund can grow without limit and without further lifetime allowance charges.

? Income is paid gross and in some countries you can set up your QROPS to provide tax efficient income.

? Avoids local succession laws.

? Option to invest and receive income in Euros (or any currency) and therefore eliminate exchange rate risk and currency conversion costs.

? Consolidation of various funds into one scheme, making it easier and potentially cheaper to manage your pension.

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.