UK PENSION reform brings challenge and change to the ways in which we save for our retirement. John Westwood, Managing Director of Blacktower Financial Management (International) Ltd, explains what the new legislation means for British expatriates.
A-Day – pensions for expatriates
As from April this year – major changes are being been made to pension legislation in the UK, which will have wide ranging and largely beneficial implications for British expatriates. Up until now, most British expatriates were excluded from contributing to UK approved personal pensions, unless they had earnings subject to tax in the UK, or were allowed to remain members of UK approved employers’ schemes. Now all this will change.
Outline of the new arrangements
Perhaps the most welcome change will be the removal of the so called “concurrency” test. This prevented investors from being active members of two concurrent pension schemes unless they were linked to an employer’s scheme via additional voluntary contributions. Now, any UK citizen will be able to join any number of pension schemes at the same time.
However, there are restrictions:
• Maximum contributions into a plan is the higher of 3,600 pounds sterling per annum or 100 per cent of earnings (subject to the overall maximum of the annual allowance, see below.)
• The annual allowance has been set for the year 2006/07 as 215,000 pounds sterling, contributions rising eventually by the year 2010/2011 to 255,000 pound sterling per annum.
• A new concept, the Standard Lifetime Allowance (SLA), has been introduced. Briefly, this is the maximum amount of the pension ‘pot’ which will not be subject to tax penalties. In 2006/07 this is set at 1.5 million pounds sterling rising by the year 2010/2011 to 1.8 million pounds sterling.
Provided these limits are not breached, individuals can obtain tax relief on contributions and the funds themselves will not be subject to income tax, capital gains tax or inheritance tax. Eventually, 25 per cent of the funds may be withdrawn tax-free. Naturally, once the pensions are in payment they will be subject to UK income tax.
From now, until April 2010, the minimum age to draw a pension benefit is 50, but if ill health strikes there are grounds for taking pension benefits earlier. From 2010, the minimum age to take a pension rises to 55. Now, pension benefits must be taken by age 75, and cannot be deferred beyond that date.
In the past it was difficult for British expatriates to carry on contributing to UK schemes. That will now change. If there are any earnings subject to UK tax, then pension contributions can obtain full tax relief. On the other hand, if there are no UK taxable earnings, pension contributions can still be made, but without the benefit of tax relief at source. The table below indicates how this will operate. The vast majority of British expatriates will fall under Category 2 and can, therefore, make unlimited contributions to an approved UK Scheme. There are, however, plenty of individuals who are not resident for UK tax purposes but continue to have their salaries subject to UK tax, with Crown Servants being an obvious example. If you fall into one of the following categories, it is certainly worth considering making contributions to UK pension schemes after April 2006:
(i) Non-resident but still a member of an existing UK pension scheme following secondment abroad.
It is possible to top up contributions or alternatively consider setting up a parallel personal pension plan for diversification and flexibility.
(ii) Non-resident but member of an overseas pension scheme.
While not possible to contribute to a UK employer based arrangement, there is nothing to stop individual contributions to a personal pension plan in the UK.
(iii) Non-resident and member of a UK scheme with pension benefits now preserved.
While it will not be possible to reactivate contributions to the preserved scheme, in parallel to that, contributions can be made to a new personal arrangement.
(iv) Non-resident retired early abroad.
Provided aged under 75 years, it is possible to divert some of your savings or investments into approved UK personal pension plans.
Pros and Cons
As ever, there are advantages as well as disadvantages in investing in UK pension plans.
For many, security of dealing with approved UK institutions will be a major benefit. A key advantage is that the fund built up will not be subject to income tax or capital gains tax while it is accumulating.
In addition, if death occurs before pension benefits are taken, a lump sum can be returned in full without any tax (including Inheritance Tax) and paid to nominated beneficiaries.
When pension benefits are taken, 25 per cent of the Fund can be taken as a tax free lump sum. There is a wider choice of providers and a range of funds to suit all appetites for risk.
For those who are non-resident with no taxable UK earnings, the downside for the contributions is that there will be no tax relief granted. Eventually, when the pension comes into payment, UK tax will be deducted at source, but this may be avoided using the double tax treaties with your country of residence.
In summary, these are massive changes taking place, which will open up the world of UK pensions to British expatriates. While it was bad news that direct property investments could not be included in, for example, self invested personal pensions (SIPPs), the availability of a wide range of property funds linked to UK and International equities and fixed interest funds should give plenty of scope for the canny investor.
The scope for individuals resident and non-resident in the UK to contribute to UK-registered pension schemes
Anyone aged under 75 will be able to join and contribute to a UK registered pension scheme. Eligibility for tax relief on the contributions will depend on the membership category into which the individual falls in the particular tax year.
Category 1: The individual is resident in the UK, or has earnings chargeable to UK tax.
Category 2: The individual is non-resident and has no earnings chargeable to UK tax.
Category 3: The individual is in Category 2 for the current tax year, but came under Category 1 within the previous five tax years.