2011 saw the introduction of significant changes to the UK pension legislation. While most were welcomed and do provide a little more flexibility, many expatriates still find that th
2011 saw the introduction of significant changes to the UK pension legislation. While most were welcomed and do provide a little more flexibility, many expatriates still find that the UK rules restrict their options and would like more control over their pension funds.
With life expectancy increasing you may need your pension fund to provide adequate income for up to 30 years or more, and you may also hope to be able to leave some balance to your spouse and children. It is important that you take the time to ensure that you have chosen the best options for your pension funds, taking into account both the UK and your local rules and taxation on pensions.
Here is a summary of the changes to pension legislation that came into effect in April 2011:
– Alternatively secured pensions (ASP) were scrapped and if you choose not to buy an annuity ?income drawdown? will apply throughout life. The amount of income you can take is now between 0% and 100% of the Government Actuary?s Department (GAD) rates. The minimum and maximum will usually be reviewed every three years and could change.
– There is a new ?flexible drawdown? option, but it is only available to those who can meet a ?minimum income requirement? (MIR) of ?20,000 guaranteed annual income for life. Only ?pension? income will be considered, excluding drawdown payments and overseas pensions (QROPS and QNUPS). Once in flexible drawdown you cannot make tax relievable pension contributions that year or remain an active member of a defined benefit scheme.
– Protected rights funds can use the normal ?capped? income drawdown basis but cannot go into flexible drawdown.
– There is no longer an age limit to buy an annuity (you do not need to buy one at all), so your fund can remain invested throughout your retirement and the balance left to your heirs.
– Previously you had to take your pension commencement lump sum by age 75. This age limit has been removed, but if you want to take a lump sum you need to do so when you start taking benefits ? you cannot take it later.
– If have started drawdown when you die, any lump sum paid to your heirs will suffer a 55% tax charge ?designed to recover past tax relief? (previously it was 35% before age 75 and up to 82% post age 75). This is seen as penal given most people will have had tax relief on most of their contributions at no more than 40%.
– If you have not yet started drawing benefits, the lump sum paid out on death will be tax free if you are younger than 75 but liable to the 55% tax if you are older.
– Residual pension assets on death are not additionally subject to UK inheritance tax (IHT). HM Revenue & Customs will however clamp down if schemes are set up to abuse this.
– The latest age for the lifetime allowance test remains at 75, but with effect from April 2012 it will be reduced from ?1.8 million to ?1.5 million. If you have pension savings over ?1.5 million you can take action before 5th April 2012.
– The final age for contributions remains 75.
British expatriates with private pensions do have the option of transferring them out of the UK and into a QROPS (Qualifying Recognised Overseas Pension Scheme). QROPS provide various advantages over UK pensions, some starting immediately and others after you have been non-UK resident for five consecutive UK tax years.
Before making any decisions on the best strategy for your pension fund, you should consider all the following:
1) What are the pros and cons of buying an annuity (remember once you have purchased an annuity you generally cannot change it)?
2) How much income do you need to take each month?
3) Do you want the ability to be able to adjust the monthly income if necessary (eg to compensate for exchange rates or if you have extra expenses)?
4) Do you want to maintain or increase control over the investment strategy?
5) Is the investment strategy designed round your current situation as an expatriate?
6) Should you take a lump sum?
7) How could exchange rate movements and costs affect you?
8) Do you want to pass the balance of your fund to your choice of beneficiaries?
9) How are pensions and lump sums taxed in your country of residence?
10) Can you reduce the income tax liabilities on your pension income?
11) Can you reduce death taxes on your pension fund?
12) Do you have non-pension assets that can provide a reliable income if needed to supplement your pension?
As with any wealth management decisions, there is no one-size-fits-all solution and your strategies need to be specifically designed around your personal circumstances, objectives and time horizon. Discussing your situation with a professional advisory firm like Blevins Franks will give you confidence that you have fully considered all the options and established the best way forward for you.
By David Franks, Chief Executive, Blevins Franks
12th September 2011