UK pensions at the precipice

The conservative party obviously believes the UK will survive the furore but their ambitious agenda for economic reform may not fare so well in the long term. Using the word “long” seems naïve when we all know the time horizon politicians work to is a single parliamentary term!

After a well-orchestrated series of leaks and public announcements, the legislative amendments from April 2015 are as follows:

Starting at the end and working back – Death benefits

Good news for your loved ones – should you pass away before you attain 75, there will be no tax charge for beneficiaries if benefits are paid in the form of a one-off payment.

This is also true if you drawdown using the flexi-access drawdown or indeed if you purchase an annuity.

The not-so-good news for one’s loved ones is that if you are fortunate to surpass the 75 milestone there will be a lump sum flat rate charge of 45%. Based on current thinking and dependant on the general election outcome, this is expected to reduce to marginal rate from 2016/17.

Another option for the beneficiaries is that they can draw funds as taxable income, irrespective of age. Notwithstanding the above, if the beneficiaries opt for flexi-access drawdown, they have the opportunity of passing any remaining funds down to the next generation and so forth, subject to the same tax rules.

Minimum age to start your pension

At present you are able to draw pension benefits at the young age of 55. In the government’s infinite wisdom, they decided to increase this in line with the state pension age (SPA), with the first rise being to 57 in 2028, coinciding with SPA reaching 67.

From April 6, assuming you have celebrated your 55th birthday, all members of money purchased pensions can prise open their pension pot and draw down as they see fit (naturally dependent upon the governing rules of the pension scheme).

In essence there are two methods of accessing your pension:

Flexi-access drawdown

Members will be able to apportion part or indeed the entire amount of their pension pot into a drawdown fund, thus allowing you total flexibility to access any amount you so desire over a timeframe of one’s choosing. When you place funds in drawdown, you will also be able to draw a pension commencement lump sum, free of tax from the remaining funds. The maximum lump sum is 25% of the total fund used, which is unchanged from the existing rules.

Crystallised funds pension lump sum

Spend frenzy – members can take a portion of indeed the entire amount in the form of a one-off lump sum irrespective of first moving to drawdown. Members can still receive 25% of what was paid out as tax free with the balance taxed as pension income.

On April 6, will there be sufficient Ferraris, glittering jewels etc? Who will pick up the bill for those who have squandered their retirement nest egg? What of the insurance sector that has been hopelessly wrestling with running a budget deficit? A deficit implies they cannot afford to pay their pensioners.

According to Alasdair Macdonald, head of advisory portfolio management at consultants Towers Watson in the UK, the shortfall in private sector pension plans rose to a record £367.5bn at the end of January 2015.

More than 5,100 pensions schemes were in deficit out of the almost 6,100 tracked by the Pension Protection Fund. Total accrued-to-date pension obligations of all UK pension providers were estimated at £7.1 trillion, five times the UK’s GDP.

Options – If you’re considering moving abroad, avoid the financial Tsunami

In my view, there has never been a better time than now to seriously consider QROPS, mindful of the above pending climate change. Much has been written about the facts and benefits, so all there is left to say is, HMRC have confirmed that the new flexibility and freedom being allowed post April 5 in the UK will be extended to QROPS.
Procrastination is the thief of time – act now or forever hold your peace!

By António Rosa
António Rosa is an international Financial Adviser at Blacktower Financial Management (Int) Limited with offices in Quinta do Lago and Lisbon.
289 355 685 | [email protected]
Blacktower Financial Management (Int) Limited is licensed by the Gibraltar Financial Services Commission Licence No 00805B
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