Under the reform of ‘Freedom and Choice in Pensions’, people will have more choice about how and when they can take benefits from certain types of pensions.
Following proposals first made in March last year a Pensions Taxation Bill was published in August, with further amendments in October.
Some provisions were then clarified in last month’s Autumn Statement by the UK chancellor. There are not expected to be further changes now before the legislation is finally passed.
The majority of the changes will be effective from April 6, 2015, and will apply to ‘money purchase’ pensions only (where an identified fund is built up and the amount of benefits to be paid from it in retirement is not guaranteed but depends on the value of the pot).
People with deferred pension benefits in funded defined benefit plans (where an employer promises a specific benefit in retirement, based on earnings and years of paying in) wishing to make use of the changes must first transfer their benefits to a money purchase scheme.
Members of unfunded public sector pension schemes will not be allowed to do this.
Under the new rules, people will be able to take all of their pension pot as a one-off lump sum or as several separate lump sum payments.
For UK resident taxpayers, 25% of each amount will be paid tax-free and the balance will be subject to income tax under the usual tax bands (the highest rate being 45%).
Alternatively, it will be possible to take 25% of the total fund as a cash payment (tax- free for UK residents) then draw an income from the remaining fund (taxed under the bands).
A person can defer the point at which they start to withdraw income for as long as they wish.
Furthermore, there will be no minimum or maximum amount imposed on the amount that can be withdrawn in any year.
The Annual Allowance, which is the amount of tax-relieved pension contributions that can be paid into a pension fund, is currently £40,000 per year.
For anyone who flexibly accesses their pension funds in one of the above ways, the Annual Allowance will be reduced to £10,000 for further amounts contributed to a money purchase arrangement.
The full Annual Allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further defined benefit pension savings.
The ‘small pots’ rules will still apply for pots valued at less than £10,000. People will be allowed to take up to three small pots from non-occupational schemes and there is no limit to the number of small pot lump sums that may be paid from occupational schemes.
A quarter of the pot will be tax-free for a UK resident. Accessing small pension pots will not affect the Annual Allowance applicable to other pension savings.
The required minimum pension age from which people can start to draw upon pension funds will be 55 (except in cases of ill-health, when it may be possible to access the funds earlier).
However, this will progressively change to 57 from 2028, then it will be set as 10 years below the state pension age.
The widely reported removal of the 55% ‘death tax’ on UK pension funds has been clarified.
Whether or not any retirement benefits have already been paid from the money purchase fund (including any tax-free lump sum) the following will apply from April 6, 2015:
- In the event of the pension holder’s death before age 75, the remaining pension fund will pass to any nominated beneficiary and the beneficiary will not have any UK tax liability; this is whether the fund is taken as a single lump sum or accessed as income drawdown; or
- If the pension holder is over 75 at death, the beneficiary will be taxed under the income tax bands on any income drawn from the fund, or at 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s income tax band rate.
There will be more flexibility for annuities purchased after April 6, 2015. It will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before state pension benefits begin.
There will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and provided that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the double tax treaty between the UK and France.
However, there are French tax implications to be considered, as follows:
- You will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate.
- If France is responsible for the cost of your French health cover, you will also be liable for social charges (CSG and CDRS) of 7.1% on the amounts received.
- The former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax (if your net taxable assets exceed €1.3million).
Therefore, as a French resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action. Such advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (Qrops) could be in your best interest. Note that for those expats who have already transferred pensions to a Qrops or are thinking of doing so, the Pensions Taxation Bill makes provision for the pro posed UK pension reform to follow through to such schemes.
However, a complication exists, due to the fact that the separate UK Qrops Regulations do not necessarily allow people to fully cash in their pension funds in all circumstances.
Therefore, before the new flexible rules could apply to a Qrops, the UK regulations must be amended. It is understood there is on-going work in this regard. Whether this will be completed before April 5 is not known.
However, even if the UK does amend the Qrops regulations it will then fall to individual Qrops jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own regulators may not agree entirely with the UK’s ideas of flexibility.
In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation out- come of someone fully cashing-in their pension fund (whether while still in a UK pension arrangement or if later allowed, from a Qrops) is likely to be a sufficient practical deterrent for anyone actually wanting to do this.
Therefore, for someone who has left the UK, a Qrops should continue to be a viable alternative to retaining UK pension benefits, particularly as the advantages of a Qrops have not changed.
