Finally a UK Budget of all budgets that for the first time in 90 years has put forward some ground-breaking changes to how you can draw from your private UK pensions. Has this freedom come at a cost?
For years UK lawmakers have maintained some very restrictive and, frankly, quite miserable pension laws, with Qualifying Recognised Overseas Pension Schemes (QROPS) offering the only opportunity in breaking those shackles.
The standard marketing line from the QROPS industry has been a headline-grabbing solution to “Free Your Pension”, which subsequently tested the rules as to whether or not a pension was exempt from certain taxes or indeed if it could be used to invest in residential property.
It turned out that this did not provide enough clarity without making members feel that they were following a dark and seedy pathway with an intent to ignore the rules normally set aside for UK residents or those with too small a pot to even contemplate the cost in moving it offshore.
By next year it is highly unlikely that you will have to spend the additional cost of moving your pension fund to an offshore jurisdiction that may suffer a financial meltdown of one description or another. The UK Exchequer’s proposals have put under consultation the veritable option of the flexibility to make uncapped drawdowns from April 6, 2015 without any pre-conditions whatsoever.
This is fantastic news, particularly for those with any number of small pension pots in the tens of thousands and who were faced with no other option but the expense of moving them offshore or purchasing an annuity at some very poor lifetime rates.
This newfound freedom does come at a cost which, by and large, is the acceleration to personal taxation on large withdrawals and, ergo, is the price that must be paid.
The UK pension industry has been built on the foundations of exemption to a lifetime of virtually no tax on the profits and also that the UK Revenue has contributed towards these long-term savings vehicles to match the individual members highest rate of tax.
The thought process was for the pensioner, when finally drawing, to eventually be taxed on the income built not just on their contributions, but also on the tax-free growth and the generous tax credits bestowed by the UK Revenue for each pension member based on their highest marginal rate of tax.
Now the UK Revenue could have the potential to accelerate their tax receipts as pension members draw their tens and thousands of pounds from their pension pots. There is still the 25% tax-free cash, these days referred to as the Pension Commencement Lump Sum for UK tax residents, but the attraction of a Portuguese tax residence could possibly end up saving the day for many would-be pensioners.
There appears to be some generous allowances on withdrawals to certain genres of private pension income of up to 85% that make the 25% seem, well, rather pale in comparison. According to the law, it is a statutory right for the Portuguese tax resident that 85% of the withdrawal is assessed as capital receipts and the balance assessed as the income for assessment should you qualify. Even with absence of a noteworthy personal allowance in Portugal, a combination of new laws on UK pension withdrawals under a Portuguese tax assessment could make Portugal the retirement destination of choice.
It has to be noted that securing an income from pension funds should be at the top of your list, so before you leave your senses behind and buy that luxury sports car, an entirely new Chanel wardrobe or even that cash gift for your children’s much needed deposit to get them on the property ladder, consider your financial position as a whole and take objective and independent professional advice.
A potential warning for the more risk averse: perversely, because of a potential draught of the annuity market in the UK which has been estimated to shrink from £12bn to £4bn, you may also see annuity rates become competitive once more, so take your time, gather valuable opinion and let the dust settle before you dive for freedom.
This article is intended to provide a general review of certain topics and its purpose is to inform but not to recommend or support any specific investments or course of action.
This article represents our interpretation of current and proposed legislation and HMRC practices as at the date of publication. These may change in the future.
By Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000.. | 289 561 333
