Radical reforms to UK pensions planned next April will affect a significant number of UK citizens and could revolutionise the choices for certain pensioners, giving total freedom over how much they can draw down.
This could even be the total value of their pension pot, with no time restriction. It will affect anyone with a Personal Pension Plan, a Self-Invested Personal Pension (SIPP) or a company “defined contributions” pension.
It is not yet known how France will view these changes, although it will react to stamp out any abuses. Graham Keysell of The Spectrum Group answers questions.
What is the current position?
On “retirement” (from age 55), you can take 25 per cent of the value of your pension plan as a Pension Commencement Lump Sum (PCLS), which is tax-free in the UK. This does not necessarily mean you have stopped working.
The maximum pension you can take each year is set by government actuarial figures to ensure enough remains in your pension pot to continue paying you for the remainder of your life. At 75, you must buy an annuity or opt for an Alternative Secured Pension.
The annuity gives a guaranteed income for life, but the already unattractive rates have fallen considerably recently. Of more concern is the fact that your pension pot, which buys the annuity, is owned by the insurer paying your pension: so when you die, it stays in its coffers. There are options to continue to pay a spouse’s pension, or guarantee to provide a minimum of the equivalent of up to 10 years’ payments, but these come at a cost. The Alternative Secured Pension allows you to continue to take money from your “pot”, but there is a tax charge of up to 82 per cent on lump sums bequeathed to beneficiaries. If you die before 75 and no benefits have been taken, the total fund (up to the Lifetime Allowance), can go to your beneficiaries free of tax.
What will change from next April?
There are no plans to withdraw the right to take the 25 per cent PCLS. You can also still convert your lump sum into an income via an annuity or arrange for an income drawdown via a SIPP.
You will no longer be obliged to purchase an annuity at 75. The Alternatively Secured Pension would be replaced by “capped income drawdown” for life. Once you die, your spouse receives the spouse’s pension and pays income tax on it.
Alternatively, you can leave the remaining value of your pension fund to your spouse or beneficiaries, although tax will be charged at 55 per cent. This is less than the current rate for over-75s, but is more than the 35 per cent rate for under-75s.
The UK government says this is to deter people using their pensions to avoid paying inheritance tax. Expatriates are fortunate as they can reduce this tax to zero per cent by transferring the pension to a Qualifying Recognised Overseas Pension Scheme (QROPS).
However, this is not suitable for everyone and it is essential to seek good professional advice before taking such action.
What is the major change?
That is the freedom to take as much pension income as you want. If this is the case, there is no reason to suppose a QROPS policy will not enjoy the same benefits. In addition, QROPS policies may well offer a wider range of investment opportunities and choice of currencies.
What are the retirement income limits?
These have not yet been announced. However, it is thought anyone with annual income more than £10,000 can use this “flexible drawdown”. With the full state pension paying £5,078, you would therefore need to prove a guaranteed additional income for life of approx £5,000 (e.g. an annuity or a defined benefit pension).
If I qualify, should I take advantage of the changes?
Generally, if your pension fund is worth less than £100,000, it might be better to take out an annuity. However, each person’s circumstances are different, so you should get professional advice.
What about people who become 75 before next April?
The government increased the compulsory age for taking annuities to 77 in the recent Emergency Budget.
What if my total pensions are fairly modest?
If you are between 60 and 75, and your total pensions (not including the state pension) are less than £18,000, these can be taken as a lump sum under HMRC Triviality Rules.
This figure will fall to £15,000 if proposals are adopted to reduce the £1.8 million “lifetime allowance” pension pot to £1.5m.
Can I still make use of a Qualifying Non-UK Pension Scheme (QNUPS)?
The annual allowance (the amount that can go into a pension and qualify for tax relief) will be slashed from £225,000 to between £30,000-£45,000, and this, coupled with the proposed restrictions on the amount of pension contributions you can pay into UK registered pensions, will make QNUPS even more attractive to expatriates. There is no maximum age for making contributions, nor any limits on their amount. You do not need to have any income from employment.
They could be effective in avoiding both UK and local inheritance tax. Finally, pension funds are also usually exempt from both Wealth Tax and French succession law.