We are now approaching the new tax year and from 6th April 2015 the rules that govern UK pension schemes are changing.
For the majority of people, deciding what to do with their pension at retirement is likely to be the biggest and most important financial decision they will ever have to make, as it will affect your future financial security and perhaps even the standard of living that you are able to enjoy. As such it is essential that you receive accurate and up to date advice from a qualified specialist.
As an expatriate there is also the added issue that you need to consider the tax rules and any implications in your country of residence. Whilst the changes might bring opportunities for some, getting it wrong could prove disastrous for others.
What are the main changes?
The new rules are an overhaul of how you can take your defined contribution pension schemes (also known as money purchase schemes). These could be personal or group personal pension schemes, stakeholder, SIPPs (Self-Invested Personal Pensions) or Small Self-Administred Schemes and some AVC’s (Additional Voluntary Contribution schemes.
From 6th April 2015, if desired you will be able to take out as much as you want out of your defined contribution pension schemes and it will be treated as income. The amount of tax you pay will be dependent on your other income in that tax year. Under the current rules which are soon to expire, you would have been taxed at 55% on any excess that you take as a lump sum over your entitlement to a 25% tax free pension commencement lump sum.
Will I still be able to receive 25% of my pension pot as a tax free lump sum?
Yes you will still be able to access 25% of your pot without paying any UK tax on the sum you receive. However a word of caution for expats here as although this is tax free in the UK, it may still be subject to income tax in the country you reside. This is often the case in Spain for example.
Do I have to take the money as lump sums or can I take it out as a regular income?
The new rules will simply give you more flexibility, where as previously the amount of income that most people could take at retirement was linked to the rate set by the UK GAD, this has been abolished and you will be able to drawdown an income from your fund at whichever rate you choose, and you can adjust this in the future if desired.
So in theory I could take my whole pension out in a single lump sum and purchase a property abroad, if I wanted?
Yes this would certainly be possible , however the tax free entitlement is still the same at 25% of the fund value, anything over this will be subject to income tax. So while on the face of it the headlines here might make this type of scenario sound attractive, the reality is that higher rate income tax of 40% becomes payable where income (after using the personal allowance) exceeds £31,866 and additional rate tax of 45% above £150,000. So whilst it is possible, in practise it would not be very tax efficient at all, and that is before we even get into the argument as to whether this would be a sensible thing to do with money that is supposed to provide you with an income for the remainder of your life!
What happens to my pension when I die?
Under the new rules if you die under age 75 you will be able to pass the full value of your fund to your beneficiaries without any tax due, regardless of whether you have been drawing from the fund or not. Previously if you had been drawing an income this option would cost your beneficiaries 55% in tax.
For those that die over 75 the options are not quite as generous. If the funds are unspent, that is they have not been used to provide you with any benefits, either in the form of a lump sum or as income, then you can pass this on to your beneficiary(s) who will pay tax at 45% if they want to take the fund as a lump sum, or if they take the money as a regular income, they will simply be liable to income tax at their prevailing rate.
Is my final salary scheme (defined benefit) affected?
It depends on the scheme. From April it will not be possible to to transfer to from unfunded public sector schemes, these typically include the Armed Forces, NHS, police, firefighters and teachers pensions. However if you are in a private sector or funded public sector scheme you will still be able to transfer to a defined contribution scheme if you want to. But remember, you will be giving up guaranteed benefits, and it is important you take qualified independent financial advice before deciding if this option is suitable for you.
Will this affect both SIPPs and QROPS?
This will affect SIPPs (Self-Invested Personal Pensions) as a SIPP is still a UK pension scheme governed by UK pension rules, regardless of where in the world you might be living. If you have a QROPS (Qualifying Recognised Overseas Pension) however, then your beneficiaries will remain unaffected by the potential tax on death after age 75. When you die with your funds in a QROPS, regardless of age, the benefits remain tax free for your beneficiary whether taken as a cash lump sum or as income.
A final word of caution
Any decision that you take with regards to your pension will have huge significance, and as an expat living abroad this is even more apparent. In addition to more general considerations, the tax and succession rules of your country of residence must also be considered, as does any potential double taxation. Furthermore great care must be taken when deciding whether to surrender any defined benefits in favour of the more flexible defined contribution rules, and a critical yield analysis will first need to be carried out by your financial adviser.
For a free pension health check from a UK qualified financial adviser, or if you just want to ask a few questions, please get in contact with us and we will be ready to help.