UK Pensions 2015 – What Can You Do With Your Funds?

2015 sees the introduction of a new pension regime in the UK. It provides UK residents and British expatriates with a range of options for their pension savings. What will the changes mean for you? What can you do with your funds?

After first being announced in the March budget, further reform was released in stages over 2014. It is therefore important that you are up to date on all the changes and latest legislation. There are different rules for different types of pensions, so it is rather confusing.

In order to make an informed decision, you need to be aware of all the implications of all your options, for your long-term financial security, for your heirs, and from a UK and Portugal taxation point of view. It is increasingly important to seek expert advice on the detailed implications – and opportunities – given the breadth of these changes and how they interact with Portuguese taxation.

Here is a summary of the key changes from April 6 2015, which apply to those with defined contribution schemes and aged 55 or over:

▪ You will have complete freedom to draw down as much or as little of your pension pot as you wish, with no requirement to buy an annuity.

▪ If you cash in your entire pension you will no longer be charged the 55% unauthorised payment tax charge. UK residents will pay tax at their marginal rate of income tax. For non-UK residents, where a double tax treaty applies, as is the case with Portugal, taxation falls to their country of residence.

▪ The maximum cap on withdrawals and minimum income requirements for income drawdown are removed.

▪ You can take a series of lump sums from your pension funds without having to enter into a drawdown policy. This is referred to as uncrystallised fund pension lump sums (UFPLS). In the UK, each withdrawal is regarded as 25% tax-free cash and 75% taxed income.

▪ UK residents can choose how to take their 25% tax-free cash lump sum. They can either take it all in one go, or have a quarter of any withdrawals made paid tax-free.

▪ The 55% pension ‘death tax’ will be abolished. If you die under age 75, the balance of your fund can be paid to your choice of beneficiaries as a lump sum or drawdown, tax free. If you are over 75, beneficiaries pay their marginal rate of tax on the income. If they opt to take it as a lump sum, it will be taxed at 45%, though the government hopes to change this to the marginal rate from 2016. This applies to both drawdown and annuities, but not to those in final salary pensions.

▪ If you have an existing drawdown plan, you can keep it as it is and retain the current income limits (150% of GAD). This may be of interest to you if you are still able to contribute more than £10,000 to your fund.

▪ The lifetime allowance of £1.25 million still applies. A new requirement for Qualifying Recognised Overseas Pension Schemes (QROPS) to be tested against the allowance more than just at crystallisation has been introduced.

Many of the new pension options apply specifically to defined contribution schemes. From April 2015 those with private sector defined benefit pensions could transfer to a defined contribution scheme, but be aware that you could lose valuable benefits. Transfers can only be made with advice from a pension transfer specialist regulated by the UK Financial Conduct Authority. Most Public Sector schemes will not be able to transfer after April 2015.

We are still waiting for guidance from the government on how this pension reform will affect QROPS.

You have to consider tax implications in Portugal to establish what would work best for you. The local tax regime can provide opportunities, if you take specialist advice. This is particularly the case for those registered with, or for eligible for, the Non-Habitual Resident scheme.

Be aware that pension schemes offer sound UK inheritance tax protection, and if you cash in the fund it would be exposed to this tax. However with expert advice you may be able to avoid or lower your liability.

This article can only cover the key points of the new legislation and only provide a summary. There are also other elements you may need to consider. Sound financial planning and personalised advice is essential, particularly for those with larger funds. Do not make any decisions until you have all the information and understand all the implications.

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. Tax information has been summarised; an individual is advised to seek personalised advice.

By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com