It is not long now before the new pension rules come into effect on April 6, 2015. Deciding what to do with your pension savings is likely to be one of the biggest financial decisions you ever make, because it affects your long-term financial security.
With careful consideration and planning, the new rules could open up attractive opportunities for you. On the other hand, getting it wrong could have serious and unexpected consequences in future. Specialist advice is essential here – even more so because as an expatriate you need to consider the tax rules and implications in your country of residence.
Defined contribution schemes
The new rules apply to those aged 55 and over with defined contribution schemes. For example, individual or group personal or stakeholder pensions, Self-Invested Personal Pensions (SIPPs), some Additional Voluntary Contribution (AVC) schemes, Executive Pension Plans (EPPs) and Small Self-Administered schemes (SSASs).
In summary, your options are:
• Take the whole fund out as cash in one go.
• Make withdrawals of any amount as and when you want. The balance can remain invested.
• Take regular income through income drawdown. You draw directly from the pension fund, which remains invested.
• It should be possible to take the 25% tax free lump sum straightaway and take taxable income through income drawdown at a later date. Remember the lump sum is only tax free in the UK; you need to look at the rules of your country of residence.
• Take a secure regular income through buying an annuity.
If you do choose to take all or much of your fund as cash, you should first ensure you have a reliable plan for your long-term financial security.
Just because the rules are there though does not mean that your pension scheme will allow it. It is up to each one to decide what they offer members, and many will not be ready by April. Some schemes may only make payments of withdrawals to UK bank accounts, which would be a problem for some British expatriates.
What about the 55% ‘death tax’?
Currently, it is normally only possible to pass a pension on as a tax-free lump sum if you die before age 75 and you have not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge.
From April 2015 this tax charge will be abolished. If you die before age 75, your beneficiaries can take the whole pension fund as a lump sum or draw an income from it tax free.
If you die after age 75, if your beneficiaries take a regular income, it will be taxed at their marginal rate. If they take the whole fund as a lump sum it will be subject to 45% tax, though this may change from 2016.
Annuities will be treated in the same way as drawdown pensions in respect of death benefits. However, final salary schemes are not.
Defined benefit pensions
If you have a defined benefit scheme (e.g. final salary), if you want to take advantage of the new rules you have to transfer to a defined contribution scheme.
From April it will no longer be possible to transfer from unfunded public sector schemes.
It is important to note that you could lose very valuable benefits if you transfer out of a defined benefit pension. It is essential you understand all the consequences and then make a carefully considered decision.
The government has therefore imposed a rule that anyone thinking of transferring out of a defined benefit scheme (if valued at over £30,000) must receive advice from a pension transfer specialist regulated by the UK Financial Conduct Authority. This also applies to people who are living outside the UK.
For peace of mind, you should apply this advice to all your pension decisions – i.e. speak to a regulated adviser. You want to ensure you receive a high level of trustworthy advice when determining what to do with your pension.
If this all sounds complicated, it is because it is. And you cannot afford to get it wrong. You need to weigh up all your options, including Qualifying Recognised Overseas Pension Schemes (QROPS), before you can determine what is best for you. You need advice from a firm that specialises in both pensions and taxation, and for both the UK and Portugal.
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
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