Why British expatriates need to be prepared for pensions A-Day
AS PART of the UK Pensions Simplification proposals, important changes have taken place that British expatriates should be aware of. The proposals will be introduced on April 6, 2006 (also known as A-Day) and some will affect the ability for non-UK residents and their employers to make contributions to UK pension schemes, which will differ from the rules currently in force.
Under present rules, there is a difference between them, depending on whether the pension in question is a personal pension plan or company pension plan. If it is a personal pension plan, then a non-resident can contribute to it, if they have net relevant earnings in the UK. They may contribute up to the higher of the earnings threshold (3,600 pounds sterling) and the appropriate percentage of their relevant earnings from a basis year – this starts at 17.5 per cent of earnings and increases with age after age 35.
The basis year is either the year of the contribution itself or the earnings for any of the previous five tax years. This allows individuals to choose a year in which they may have had higher earnings (for example, because of a large bonus) as the basis for increased contributions in subsequent years.
If there are no net relevant earnings in the UK, before April 2001, no contributions could be made. Since April 2001, contributions can still be made providing:
• at some time in the tax year, they are resident and ordinarily resident in the UK, or
• at some time in the five tax years preceding the tax year in question, they have been resident and ordinarily resident in the UK and were resident and ordinarily resident in the UK when they set up the pension.
The above also applies to the ability of the employer to make contributions to the personal pension.
The rules for non-residents, who are members of occupational schemes, differ from the rules applicable to personal pensions. Where an employee is seconded abroad, they can continue to be a member of the UK scheme if they are an employee of a UK company. More commonly, however, the employee will be seconded to a foreign employer, usually a subsidiary company. In these circumstances, the employer can continue to make contributions providing the following applies:
• The employee’s earnings are chargeable to UK tax.
• There is a definite expectation that the employee will come to the UK either to retire or to take up employment with the employer.
• The UK employer pays the contributions and is reimbursed by the overseas company.
• The prospective pension for overseas service is based on remuneration deemed appropriate for similar employment in the UK.
• The period of overseas service should not exceed 10 years.
After April 2006, and assuming the proposed changes are implemented, anyone will be able to make contributions to a UK pension scheme, regardless of where or for how long they are resident.
This means that UK expatriates and their employers will be able to continue to contribute to their pensions. In preparation for this, the Inland Revenue has already dropped the 10-year rule for seconments abroad.
Employers will still be able to get tax relief on the contributions, but non-residents will only be able to do so if they have UK earnings as now. However, where an individual does not benefit from tax relief, their contributions will not be tested against their annual allowance or, more importantly, their lifetime allowance on taking benefits.
Pensions Simplification is something you may wish to discuss due to the greater choice that is shortly to become available. Certainly, the proposals make it viable for an expatriate to continue contributing to their pensions. Whether it is advisable to do so, however, will depend on the circumstances.
KEY POINTS
• From April 2006, anyone can contribute to a UK pension scheme, regardless of where or how long they are resident in the UK.
• Employers will get tax relief on contributions in such cases.
• Non-residents will only do so if they have UK earnings.
• If an individual receives no tax relief, then contributions will not be tested against their annual allowance or lifetime allowance on taking benefits.
