Changes to UK pensions: how will they affect you?

By Spectrum IFA
This article is published on: 14th April 2015

14.04.15

This year brings about major changes in UK pension rules. Under the reform named ‘Freedom and Choice in Pensions’, which comes into effect in April 2015, people will be provided with greater choice about how and when they can take their benefits from certain types of pension arrangements.

Following proposals first made in March last year, subsequent consultation resulted in the Pensions Taxation Bill being published in August, with further amendments then being made in the October.

Additionally, some provisions were clarified in the autumn budget statement. Therefore, subject to there not being any further changes before the imminent enactment of the legislation, we can be reasonably certain of the new rules.

TYPES OF PENSION

To understand the reform, you need to understand the two main types of pensions:

• The first is the Defined Benefit Pension (DB), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBs are a rare breed now, as employers have found this type of arrangement too costly to maintain.

This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.

• The second type of pension is the Money Purchase Plan (MPP). You put money into an MPP, as does your employer, the government (in the form of tax rebates) and, in the past, national insurance contribution rebates.

For some, your MPP was not arranged through an employer at all and you just set up something directly yourself with an insurance company.

There are several different types of MPP arrangements, but they all result in the same basic outcome. The amount of the pension that you receive depends on the value of your pension pot at retirement and so the investment risk rests with you. There is no promise from anyone and no certainty of what you might receive.

CURRENT CHANGES

The proposed reform is all about MPPs, although there is nothing to stop a person from transferring their private DB to an MPP if they have left the service of the former employer.

The majority of the changes will be effective from 6 April 2015 and these will apply to money purchase pension arrangements only. Therefore, people with deferred pension benefits in funded defined benefit plans, who wish to avail themselves of the changes, must first of all transfer their benefits to a money purchase scheme. Members of unfunded public sector pension schemes will not be allowed to make such a transfer.

Under the new rules, people will be able to take all the money in their pension pot as a one-off lump sum or as several 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 at the marginal rate (the highest being 45%).

Alternatively, it will be possible to take 25% of the total fund as a cash payment (again, tax free for UK residents) and then draw an income from the remaining fund (taxed at the marginal rate). The commencement of income withdrawal can be deferred for as long as the person wishes. 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 annum. 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.

However, the full annual allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further DB savings.

The ‘small pots’ rules will still apply for pension 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 on the number of small pot lump sums that may be paid from occupational schemes. For a UK resident, 25% of the pot will be tax free. 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 their pension funds will be set at 55, except in cases of ill health, when it may be possible to access the funds earlier. However, this will progressively change to age 57 from 2028; subsequently, it will be set as 10 years below the state pension age.

DEATH DUTIES

The widely reported removal of the 55% death tax on UK pension funds has been clarified. Thus, 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 6 April 2015:

• In the event of a pension member’s death below the age of 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.
• If the pension member is over the age of 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income drawn from the fund, or at the rate of 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 marginal tax rate.

INCREASED FLEXIBILITY

There will be more flexibility for annuities purchased after 6 April 2015. For example, 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. In addition, 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 providing 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 a number of French tax implications to be considered here, and these are 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 then also be liable for social charges 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.

Therefore, if you are 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 financial 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.

UK Pension Reforms

By Spectrum IFA
This article is published on: 30th March 2015

30.03.15

With just a few days to go until the ‘over 55s’ can flexibly access their UK defined contribution pension pots, the explosion of information already available via the internet looks to me as if this is in danger of turning into ‘information overload’.

Now of course, this is just my opinion – and please don’t misunderstand my feelings about this – because I am in total favour of people having free access to accurate information, providing that it is understandable and definitely not misleading. However, my concern comes from the volume of information that is being made available, almost in an attempt to condense the multiple choices that people will have into a sort of ‘Dummy’s Guide to Flexibility & Choice in Pensions’.

In February, “Pension Wise” was launched and this is the “free and impartial government service that helps you understand your new pension options”, that the government promised us. My first impression from the opening page of the website was favourable – a good clear design with a simple list of six steps to help us understand how to turn our pension pots into income for our retirement.

The first step seemed simple enough – “check the value of your pension pot” – nothing contentious there. It told me that I could combine multiple pension pots into one, by transferring my pension and so I clicked on that link. Whoops, now I’m out of the Pension Wise website and I’m in the Gov.UK website, which provides me with links to such things as “deferred annuity contract”, “unauthorised payment” and “fixed or enhanced protection”. Already confused? OK fine, so let me get back to Pension Wise …..

Step number 2 is all about understanding what we can do with our pension pots. Good, I thought, until I clicked through to the page and this was the first taste of ‘information overload.

There were lots of links to things that are pretty important and these took me through to “Gov.UK”,” FSCS” and the “FCA” and actually out of the Pension Wise website. There was also a link to the Money Advisory Service, so that I could compare annuities, but it didn’t like my French postcode, so that was a dead end. Being curious though, I entered my old UK postcode and proceeded through the 6-page questionnaire, including having to answer detailed lifestyle and health questions, only to find at the end that it could not retrieve my quotes!

In fact, every one of the six step pages had links that took me into other websites and for me, that’s where Pension Wise failed. In what is clearly a brave effort to try to provide comprehensive guidance (which amazingly, even includes how to calculate the UK income tax on the retirement income), I think this has the potential for disaster. There is simply too much and by the time you get through one lot of information, you have forgotten how you got there and on which part of the website you found other information that might be useful.

According to its website, “Pension Wise won’t recommend any products or tell you what to do with your money”. Hmm, I wonder what the annuity quotes would have looked like, but there again, these would have been through the Money Advisory Service and so I guess that’s how Pension Wise gets around that one!

They also say …. “We explain how to avoid pension scams and the importance of taking your time to make sure your money lasts as long as you do”. Good, I’m all for these things, but do they really mean what they say and don’t they see any risk that people might just outlive their flexibly accessed pension pot?

Even more alarming, is some of the information being produced by other companies. For example, one company writes in its literature on defined contribution pensions after April 2015: “….. You will be able to take out as much as what’s there as you want, when you want. So it’s going to feel a bit like a bank account ….” Another company writes: “…… There will no longer be an annual limit on how much you can draw and you will be able to use your pension fund like a bank account”…….

OK, maybe I’m taking these comments out of context but nevertheless, bank accounts are short-term financial products and pensions are long-term and it’s dangerous to mix the purpose of the two.

Guidance is not a substitute for professional advice and when people are faced with such a range of choices, advice is needed more now than ever.

For anyone living outside of the UK, potentially the risks of making a ‘misinformed’ choice are increased. Even if you could find a UK adviser who would be prepared to provide advice to someone who is not resident in the UK, a UK adviser is highly unlikely to have the knowledge of local tax rules in the jurisdiction where you live. In France, it is not just income tax that we have to think about, there is also wealth tax and inheritance tax, both of which might become an issue if the pension pot is cashed-in and the monies are sitting in your bank account. Therefore, it is essential to obtain advice from an appropriately qualified adviser in the country where you live.

Pensions is one of the major subjects that we are covering in our client seminars this year. We are already taking bookings for Le Tour de Finance 2015 and more information can be found on our website at https://spectrum-ifa.com/seminars/. This is a perfect opportunity to come along and meet industry experts on a broad range of financial matters that are of interest to expatriates. The local events are taking place at:

• Perpignan – 19th May
• Bize-Minervois – 20th May
• Montagnac – 21st May

Le Tour de Finance is an increasingly popular event and early booking is recommended. So if you would like to attend one of these events, please contact me to reserve your places.

Whether or not you are able to come to one of our events, if you would like to have a confidential discussion about pensions, investments and/or inheritance planning, using tax-efficient solutions, please contact me using the form below.