Are you aged between 50 and 54 and do you have pension benefits held in a UK pension plan or scheme? If you do fall into this category, then now might just be the perfect time to rev
Are you aged between 50 and 54 and do you have pension benefits held in a UK pension plan or scheme?
If you do fall into this category, then now might just be the perfect time to review your pension options.
This is because on the 6th April 2010 the UK minimum retirement age increases from 50 to 55, so there is a very small window of opportunity left to start taking benefits now. If you miss the deadline you will have to wait until your 55th birthday before being able to take benefits from your pension plan or scheme.
It is often the case that any change in pension rules is either ?phased in? over time, or is subject to what are often referred to as ?transitional arrangements?. As these phrases suggest, they are designed to lessen the impact.
However, with this most recent change in legislation it is a sudden and dramatic shift from being able to take pension benefits when aged 50 on the 5th April 2010, to suddenly having to wait until aged 55 on or after the 6th April 2010 before being able to take pension benefits. The change is indeed dramatic.
The Daily Mail calculated that three million people will ?have the option of taking early retirement snatched from them?. You can avoid this happening to you by taking action now.
Many people believe that you have to physically retire in order to take benefits from a pension plan or scheme.
This is simply not the case, and many people choose to take their pension benefits, whilst still working full time, or perhaps continue working but on a part time basis.
Many others use the taking of pension benefits as a catalyst to a move overseas sooner rather than later.
Under the new rules it is now perfectly allowable to take the maximum possible cash lump sum from your pension arrangements, but at the same time defer the taking of any income to a later date. This is often referred to as Pension Fund Withdrawal (PFW).
Furthermore, it is not now compulsory to purchase an annuity when taking benefits from a pension plan. In short, the new rules provide policyholders with a vast amount of freedom and flexibility, but if you will be aged between 50 and 54 in April 2010, and wish to explore these new rules, the time to act is now.
You are able to take a capital lump sum of up to 25% of your pension fund. You can take this for any purpose, for example to contribute towards buying property and setting up a new life abroad.
Remember that while this opportunity is currently available to you if you are over 50, from next April you would have to wait until you are 55.
Previously known as ?tax free cash?, the lump sum is now officially known as the Pension Commencement Lump Sum (PCLS). While it is still tax free in the UK, it may be taxed if received when you are resident overseas, as per the examples below:-
? Spain – A PCLS is liable to Spanish tax. So if you are aged between 50 and 55, currently a UK tax resident and planning on moving to Spain soon, if you will need a capital lump sum once you arrive there you would be better off taking it now, before the retirement age increases and while you are still UK resident. If you have to wait till your 55th birthday you may have become tax resident in Spain by then and the capital would be taxed under the Spanish rules.
? France – There is no equivalent of the PCLS in the pension system in France, and taxation of the lump sum is a grey area. Since 2005, general practice has been to not tax it, but the position may be set to change yet again. French legislators are said to be considering the issue of a law which would allow the French authorities to tax foreign pension lump sums received by French resident taxpayers.
? Portugal – There may be tax issues, according to the circumstances in which the pension fund has been accumulated. In general, a lump sum which can be shown to represent only the original amount of employee/personal contributions is exempt from tax. A lump sum representing employer contributions will be taxable, subject to limited exemptions. If the lump sum is paid within the first five years of commencement of the contract, the full amount (relating to the accumulated income) will be subject to income tax. If the lump sum is paid between five to eight years of entering the contract, 80% will be taxable, or if made after eight years, only 40% is taxable. This is thus a complicated position on which advice should be sought if you are considering moving to Portugal.
? Cyprus – Lump sums connected with pensions are not taxable in Cyprus, even if taken whilst a Cyprus resident. This is under the domestic ?exempt income? rules.
There are however some very important points to bear in mind before any action is taken.
The Financial Services Authority (FSA) have gone on record as saying that they are worried and concerned about what they have generally referred to as ?pensions unlocking?.
It is a subject that does need very careful investigation before any decisions are taken, and we at Blevins Franks very much share the FSA?s concerns here.
Our view is that you should have income from other sources before starting PFW, and should not be heavily reliant on your pension fund for income. It is not advisable to start taking your pension benefits early if, for example, you are under financial pressure and are looking for extra capital to help meet loan and credit card debts.
Whilst we readily accept that there are obviously advantages to taking pension benefits from a younger age, the option is not suitable for many people and you need to take professional advice to ensure it is appropriate for your circumstances. To reiterate, the UK FSA warns about the risks/potential mis-selling abuses related to ?unlocking? your pension. Your pension needs to provide you with an income for life, and releasing cash early could sacrifice future pension income. You would therefore ideally have substantial assets outside of the plan, which are available to generate income for you.
This increase in the minimum retirement age was announced in the pensions legislation reform, which came into effect on 6th April 2006 – otherwise known as ?A-Day?.
The legislation also paved the way for pension rights to be transferred into Qualifying Recognised Overseas Pensions Schemes (QROPS), which provide various benefits and tax advantages for expatriates.
While you can transfer into QROPS at any age, you cannot take your benefits any earlier by transferring to QROPS. The minimum retirement age increase therefore also applies to people who have transferred their pension funds into a QROPS and have not taken any benefits.
April 2010 is just a few months away and if you are affected by this increase in the UK minimum retirement age, you need to act now in order to get the arrangements set up.
When taking advice on UK pension fund matters, it is important to only deal with qualified professionals who are authorised and regulated by the UK FSA. If you are resident abroad, or need advice on how the overseas tax laws will impact on your pension, use an adviser like Blevins Franks Financial Management Limited which besides being authorised by the FSA is also authorised to give advice in Spain, France, Portugal, Cyprus and Malta through the EU Insurance Mediation Directive.
By David Franks, Chief Executive, Blevins Franks
11th December 2009