The biggest reforms to UK pensions in almost a century are underway. As more options become available, you need to understand how they affect you and consider what would work best for you in the short and long term.
The pension reform was first announced in the March budget. Some initial changes came into effect that month, but the main reform will start next April. The government launched a consultation on its proposed changes, and on July 21 released its response to the consultation, “Freedom and Choice in Pensions”.
Here is a summary of the key decisions reached under the process.
The government believes that individuals should be trusted to make their own decisions with their pension savings. From April 2015 pension scheme members aged over 55 with defined contribution schemes will be able to access them as they wish – there will be no restrictions on how much you can withdraw, you can even take the whole amount.
For UK taxpayers, the first 25% will be tax free and the remainder at the individual’s marginal UK tax rate.
Expatriates need to consider the tax implications in their country of residence. With the local Portuguese tax rules, flexible drawdown can be an attractive option. However, the funds withdrawn will form part of your estate for UK inheritance tax purposes, so you need to plan for that.
Transfers out of private sector defined benefits pension schemes will still be allowed, up to the member’s normal scheme retirement date as opposed to within 12 months of that date.
It will be a statutory requirement for such transfers to have been advised by a professional financial adviser who is independent of the scheme and authorised by the UK Financial Conduct Authority (FCA).
Further consultation will be carried out to determine the viability of partial transfers. Transfers out of unfunded public sector defined benefit schemes will not be allowed. Transfers from funded public sector defined benefit schemes will be allowed, subject to the same safeguards as outlined for private sector scheme transfers.
Currently, a 55% death benefit tax charge is levied on pensions that remain invested when the holder dies. The government has now announced it will cut this charge, with a new rate to be announced in the Autumn Statement. It appears that the ‘death rate charge’ will not be replaced with an inheritance tax charge.
Legislation will be introduced to enable product providers to introduce more flexible annuities, for example annuities that allow reducing payments and one-off withdrawals.
The minimum pension age will increase from 55 to 57 in 2018 and thereafter it will be 10 years below the state pension age. This will not apply to certain public sector schemes such as the armed forces, police and firefighters.
For those aged over 55 after April 2015 and still in employment, annual pension tax relief will be limited to £10,000 for further contributions where benefits in a defined contribution scheme have been drawn.
A free ‘Guidance Guarantee’ will be provided to members on the features and considerations of the new pension choices. This will be provided by The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). The Financial Conduct Authority intends to pay for this service by raising a levy on regulated firms.
The government recognises that the changes to the pension tax rules will have implications for the rules relating to Qualifying Recognised Overseas Pension Schemes (QROPS). It will consider these implications further to ensure that the rules relating to QROPS are appropriate when the new system comes into force.
There was no news on the suggested removal of, or change to, the lifetime allowance.
These reforms follow on from the transitional changes that were implemented from March 27 2014:
▪ The minimum income requirement for accessing flexible drawdown reduced from £20,000 to £12,000.
▪ The capped drawdown limit increased from 120% to 150% of equivalent annuity.
▪ The total pension wealth people can have before they are no longer entitled to receive lump sums under trivial commutation rules increased from £18,000 to £30,000.
▪ The small pension pots lump sum limit increased from £2,000 to £10,000, and the number of pots that can be taken as a lump sum increased to three.
These pension reforms are very welcome, but it is essential that you understand how all the options work for you and weigh up what would be most beneficial for your circumstances and aims. The tax element, both in the UK and here in Portugal, plays an important part. Specialist advice is important to make sure you get it right.
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