This article is a round up of pensions news which could potentially affect British expatriates. Changes to UK pension regulations – In December the UK government is
This article is a round up of pensions news which could potentially affect British expatriates.
Changes to UK pension regulations
In December the UK government issued a further draft of the Finance Bill 2011, which includes changes to its pension regulations. Unless there are further amendments, the following will apply as from 6th April 2011.
?Inheritance tax will no longer typically apply to drawdown pension funds remaining under a registered scheme. The IHT anti-avoidance charge where a member omits to take their retirement entitlements is removed.
?There is no age limit to buy an annuity and you can continue in drawdown and keep your assets invested as long as you wish.
?Alternatively Secured Pensions and their 82% tax charge are abolished (existing ASPs will covert to drawdown).
?The death charge on the balance of drawdown funds increases from 35% to 55% for those under 75. For all (in drawdown or not) those over 75 the charge reduces from 82% to 55%. A QROPS (Qualifying Recognised Overseas Pension Scheme) would still avoid this tax, provided you have been non-UK resident for five full and consecutive UK tax years.
?A new flexible drawdown system is introduced, where there is no limit on the income you can take. To qualify you must meet the minimum income requirement (MIR) of ?20,000, which can only be made up of secured lifetime pension income.
?If you do not qualify, income is capped at 100% of GAD – a reduction from the current 120%. It will be reviewed every three years as opposed to the current five, and every year once you are over 75.
?There is no longer an age limit for taking a lump sum (currently it is 75). The government may later also remove the starting limit of 55 years.
The Finance Bill draft also confirmed that the reduction in the Lifetime Allowance (LTA) from ?1.8 million to ?1.5 million will come into effect on 6th April 2012 (and not in 2011 along with the other changes). This only applies to UK schemes, if have transferred into QROPS this is not an issue for you.
If your UK pension savings exceed the LTA, the excess is subject to a 25% tax charge if drawn as income and that income is liable to tax. If, for example, your pension fund amounts to ?2 million, starting April 2012 your tax charge will be ?125,000. If you took the excess as a lump sum it will be subject to a one-off 55% recovery charge (?275,000 in this example).
Remember that investment growth could result in the limit being breached.
The Finance Bill however introduced a transitional measure whereby savers can apply to HM Revenue & Customs (HMRC) before 5th April 2012 for a LTA of ?1.8 million if their pension savings are above ?1.5 million or they expect investment growth to push them above this level. This will be called ?Fixed Protection?. If you do this, however, you will not be able to accrue further benefits after 6th April 2012, so you need to carefully weigh your options.
If you are affected you should seek advice on the most appropriate course of action for you.
If you transfer pension funds into a QROPS this would be a benefit crystallisation event (BCE) and so liable to a 25% tax charge if the LTA is exceeded. Once in a QROPS however the funds are no longer UK pensions rights and so not liable for further tax charges if you breach the LTA. It may be better to make the transfer and pay the charge now since it will be capped and cannot grow any larger.
New Zealand QROPS
Expatriates can take their pension commencement lump sum after moving into a QROPS (provided you have not already taken one), but how much cash can you take?
A QROPS must follow certain HMRC rules to be fully approved. One rule is that a minimum of 70% of the fund is to provide an income for life. A QROPS should therefore not allow anyone to take more than 30% of their fund as a lump sum (in practice it is often 25%).
If you do, HMRC can impose a 55% penalty for ?trust busting?, even if you have been non-UK resident for over five years. HMRC can, and has, remove approval from an entire jurisdiction.
There has been debate over some New Zealand QROPS because they allow 100% lump sums. Some of the country?s senior advisers have established a working party to clean up the industry and protect the country?s reputation. They are concerned that HMRC may withdraw its approval and the local regulators are expected to take action on perceived abuses as a result.
HMRC is believed to be concerned about some New Zealand schemes, though we are not aware it has taken any specific action yet.
A New Zealand tax lawyer and pensions expert, Michael Reason, recently said it was inevitable that New Zealand regulators will intervene if local QROPS are not acting as genuine retirement planning schemes.
?I am concerned about New Zealand?s future as a QROPS jurisdiction when advisers allow members to be seen to have the sole intention of accessing cash in a single payment prior to retirement age. Such a basis for using NZ QROPS schemes is unlikely to be viable,? he said.
When selecting a QROPS to transfer into, you should ensure that it works both within the spirit and the letter of the HMRC rules.
UK pensions are heavily regulated and even you if are no longer a UK resident your UK pension funds need to conform to the UK rules, especially during the process of transferring your pension into a QROPS. For peace of mind that you will not have to pay any extra or unnecessary charges or penalties you should seek professional advice from a wealth management firm like Blevins Franks.
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. Information has been summarised; an individual must take personalised advice.
By Bill Blevins, Managing Director, Blevins Franks
20th January 2011