UK Pension Tax Changes 6th April 2016 (lifetime allowance)
By Chris Burke
This article is published on: 3rd March 2016
Anyone who has a private or company pension in the UK could be affected by the changes being brought in on the 6th April this year. This may be anyone with private pension(s) whose combined value is around £1,000,000, or a company pension scheme which would give an income in retirement of approximately £40,000 per annum.
In essence, the changes affect the tax you would pay on this money. Up until now, any pensions combined under £1,250,000 in real value would not be subject to any further taxes than those of normal income or inheritance tax. However, any pension with a value higher than this would be subject to additional taxes. This allowance is called a ‘Lifetime Allowance’ (LTA). The tax on pensions over this value can be up to 55%.
As from April this year, this Lifetime Allowance Value is being reduced to £1,000,000. Therefore, any pensions combined worth more than this would now be liable to these potentially additional taxes.
If you have a Corporate, Company, Final Salary or Defined Benefits Scheme this will also be tested against the new Lifetime Allowance. These Schemes are based on your final salary when leaving your employer as opposed to contributions and investment growth, and the amount usually has to be multiplied by a factor of 20 in order to calculate the capital equivalent value. These Schemes also usually pay a tax-free lump sum, and this also has to be included in the LTA calculation. Therefore, depending on the pension(s) this new limit may affect you.
What are the key factors involved in the Lifetime Allowance testing?
Retirement after age 55: Once a lump sum/income is taken from a Pension, these are tested against the LTA.
At age 75: Any Pensions that have not been accessed will be tested against the LTA at this time. Pensions in drawdown will also be tested again at this time.
Death pre-age 75: Pensions will be tested against the LTA to ensure that the limit has not been exceeded.
Transfer to a QROPS (Qualifying Recognised Overseas Pension Scheme – when you transfer your pension outside of the UK): If a UK Pension Scheme’s funds are transferred into a QROPS, the value of the transferred funds are tested against the LTA.
Of course, the main point here for many people is death before age 75. If this happens, as is stands your pension will be subject to this potential tax from £1,000,000 and above.
What are the tax charges?
If the Lifetime Allowance is exceeded, then the tax charges will depend on how the excess is paid from the Scheme.
If as a lump sum (normally the case in inheritance): subject to a 55% tax charge.
If as a Pension Income: subject to a 25% tax charge.
Transfer to a QROPS: subject to a 25% tax charge on the excess above the LTA.
Is there any protection against Lifetime Allowance charges available?
The UK Government has confirmed that from April 2016, the following two protection regimes will be available, allowing individuals a fixed or individual LTA dependent on the value of their Pensions and/or the type of protection:
Fixed protection 2016: This ‘fixes’ the LTA at the current £1.25m. In order for this to apply, no further Pension benefits can be accrued in a Scheme on or after 6 April 2016.
Individual protection 2016: The LTA will be set at the value of the Pension on 6 April 2016, when the new £1m LTA is introduced, so long as it is valued between £1m and £1.25m. This protection does allow further contributions, but any Pension in excess of the protected LTA will be taxed on the usual way when tested.
What about a transfer to a QROPS/Overseas pension scheme?
This currently enables an individual to safeguard their Pension Fund against this tax charge and allows the fund to carry on growing. As detailed above, the fund is tested against the individual’s Lifetime Allowance at the point of transfer, rather than at the point of each pension being tested as per above scenarios, i.e. death before pension accessed etc.
Perhaps the most important information to know regarding this, is that not so long ago the Lifetime Allowance for pensions was £1,800,000 in the UK. It is consistently reducing, which is worrying considering every twenty four years historically inflation doubles, and yet the Pension Lifetime Allowance is dramatically being reduced instead of increased, such as the tax bandings for income tax have been after years of lobbying by the general public. This could lead us to one main conclusion, the UK governments’ need to collect more and more taxes. Therefore, as the years pass by it could be this differential continues to grow and grow, in real terms meaning individuals will pay more and more tax.
The key points to consider with this are:
Having your pension(s) in the UK will enable them to be liable to the UK rules and the government’s ability to change them, including the uncertainty of what these changes may be in the future.
The Lifetime Allowance is consistently decreasing, meaning taxes are consistently increasing.
Understanding of these changes and how it might affect you could save you or your loved ones considerable money in potential taxes.
If you have no plans to retire in the UK and have pensions there, it could be worth having these evaluated to see whether it would be beneficial for you to transfer them securely outside of the UK.
Talking your personal circumstances through will put your mind at rest, or enlighten you on what your options are and how you can best plan for this eventuality.
If you would like to ask any questions regarding this subject, or speak to Christopher, a UK pensions expert who wrote this article, feel free to contact him on the details below.
Personal Financial Planning in France – if I knew then what I know now…
By Jonathan Cooper
This article is published on: 9th February 2016
A British National, I came to France in 1996 for what was meant to be a 3-year local contract. But here I am, still living in France 20 years later. Sound familiar?
This year, at the age of 57, I stopped full-time employment, though I expect to stay in France for some years to come. Here are a just few of the useful things I’ve learned over the years, as an expat in France, focusing on tips for those of you who are still relatively new to France.
Tax efficient investment vehicles
The ISA doesn’t exist in France, but the Plan d’Epargne en Actions (PEA) and the Assurance Vie (AV) do. One can invest 150k euros in a PEA, and after 5 years the gains are free from Capital Gains Tax (CGT). There is no limit to the number or amount invested for AV’s, and after 8 years, any gains on withdrawal attract only 7.5% tax (over 9200 euros/yr). Both PEA’s and AV’s attract Social Charges on investment gains. With present interest rates low, an AV older than eight years is a much better option than a savings account (Compte Epargne). Your employer might also offer you a Plan d’Epargne d’Enterprise (PEE) where investment gains are free from CGT after 5 years.
My advice to anyone becoming tax resident in France is to open a PEA and an AV as soon as you arrive, with just a small initial investment, just to get the clock ticking. You can always close them if your short term contract turns out to be just that!
Pensions, QROPS & PERPs
Years worked in the UK can be transferred to the French system, and additional years purchased at little cost, which can greatly increase the value of your French Pension.
With the 15-year Gilt Rate presently so low, UK pension pot valuations are very high. If you are thinking of staying overseas, it is a good time to consider the Pro’s and Con’s of transferring your pot to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Each year you can invest up to 10% of your salary free of income tax (within the maximum of 8 times the Social Security ceiling) in a Plan d’Epargne de Retraite (PERP), and you can accumulate up to 3 years if you do not use this 10% annual allowance. If you have been made redundant, at the end of the 3-year period of unemployment benefit, you can withdraw all the funds from a PERP free of CGT, so avoiding taking an annuity. Investments in a PERP are not subject to Wealth Tax (ISF).
Getting good, in-depth financial advice
I have always worked with one of the big French Banks and whilst they offer a range of products, their understanding of the needs of Anglo-Saxons is not always high. They recommend mainly in-house products and could be a lot more pro-active.
My employers were kind enough to offer me big consultancy companies to help fill out my annual French tax forms. The introductory meetings with senior directors always went well, but it was clear the forms were filled out by very junior staff, and their aim was to fulfil a service to the employer as much as to me – they are not at all there to offer advice and optimise tax.
Whilst it’s taken me a while to realise, it’s best to seek the assistance of specialist independent financial advisers, people who really understand both the UK and French financial space. I like to have more than one, in addition to the bank, to ensure several points of view/proposals on which to base decisions.
From experience, I can certainly recommend Jon Cooper (The Spectrum IFA Group) and Thierry Mandengue (VIP Partner) – they have undoubtedly saved me tens of thousands of euros.
In my next article, I will share my knowledge of Stock Options, PEE’s and Inheritance planning. I’d be happy to discuss expat finance further if anyone is interested (mspowell58@gmail.com).
*This article has been written by Dr. Martin Powell, a retired, British, Senior Corporate Executive living in France and a client of Jonathan Cooper
Why a Pension audit is vital for your wealth. (Part 2)
By David Hattersley
This article is published on: 2nd December 2015
In the previous article, I referred primarily to Pre-Retirement Planning. This article is devoted to Post-Retirement Planning ie. when you are already drawing your pension and are tax resident in Spain. For those that are lucky enough to be in receipt of a Defined Benefits Scheme (ie Civil Service / Company Final Salary Pension) most of this article will not apply to you. The same applies to those taking income from a SIPP/ Drawdown plan. This will be covered in a future article.
Primarily this article deals with “Money Purchase Arrangements” ie. Group or Personal Pensions, Stakeholder Pensions and Contracting Out of SERPs, where benefits are being taken and the tax free lump sum has been paid.
It is important to understand the taxation of income in Spain. Unlike the UK, “Earned Income” and “Capital Gains and Investment Income” are not added together to determine the highest rate of tax payable. They are kept separate with “Earned Income” taxed at the highest marginal rate, and “Capital Gains and Investment Income” capped at rates of between 20%, 22% and 24% for the tax year 2015. When one considers a person that has a State Basic Pension of £8,000 p.a. and Earned Pension Income of £12,000 (with the current rate of exchange of 1.4) it is quite easy to slip into the next highest rate of marginal tax of 31% for “Earned Income”.
One also needs to consider the rules for Lifetime Annuities by the Spanish Law “Renta Vitalicia” and its subsequent tax treatment of said income.
So why the need for a Pension audit when one is already receiving it and declaring it to the Hacienda? Are you paying too much tax as a result of the word Pension?
So does this apply to you? Possibly, and the likely reason why, is that your pension provider at retirement converted your pension to an annuity. You may have taken all the pension pots, used an open market option and transferred this to another annuity provider that offered better rates?
It is also vital to understand both the documentation sent by the UK provider on an annual basis and the treatment of pensions and annuities by the UK HMRC. Unlike the Spanish, the UK HMRC treats both pensions and annuities as one, and they are taxed under income tax rules. It is vital that this is understood. Even if you have previously informed the provider that you are living in Spain and are receiving your pension gross, due to UK HMRC rules, you will still receive a “P60 End of Year Certificate” from the provider. This clearly states under the heading “Pension and Income Tax details”.
In these cases you could be paying too much tax without realising it! As an honest citizen, one presents the P60, without having the original policy document translated into Spanish, to your local Abagado / Gestor, who in turn presents the documentation to the Hacienda. It is hard enough for them to fully understand English, let alone the tax laws relating to the UK re. pensions and how they differ to Spain. The same could be said if one is receiving advice from a UK based adviser or an “Offshore Adviser”, who are very unlikely to understand or be able to assist with the complexities of Spanish Tax law.
And the reason for this is that Spain’s tax rules treat the purchase of a Lifetime Annuity as “Investment Income” even when a “Pension Pot” is used. The full income tax law is LEY35/2006 de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (LEY IRPF) The specific part relating to the taxation of Annuities is found in Articulo 23 as follows:
- The taxation of lifetime annuities– Articulo 25.3 a) 2º LEY IRPF
- The taxation of temporary annuities – Articulo 25.3 a). 3º LEY IRPF
Instead of being taxed on the full income amount, a discount is applied based on the age of the recipient when the original annuity was purchased. So for someone between the ages of 60 to 65 at the time of purchase, this represents 76%. Therefore referring to the above example the taxable “Investment Income” is only £12,000 x 24% = £2,800. The £2,800 will then be subject to the lowest “Investment Income” rate of 20% (assuming no other income) ie. tax payable of £576 p.a. A very substantial saving when compared against being taxed under “Earned Income” rules. For ease, I have not calculated the rate applied if one moves into the next highest rates of marginal tax!
I have come across a number of clients in this exact situation and I am in the process of correcting this error. Already one client has had a rebate, backdated 4 years (due to the statute of limitations) and now pays substantially less tax as a result. But it is both time consuming and hard work having to track down the likes of Pearl, Equity and Law, Equitable Life, Commercial Union, Scottish Equitable, Sun Life, Clerical Medical and Eagle Star (to name but a few) who were the major providers of pensions in the 80’s and 90’s, and then confirm it was a Lifetime Annuity that was purchased.
This is further complicated by those in Final Salary Schemes like the Teachers Superannuation Scheme, who at the same time contributed to the Group AVC, and considers that the pension income comes from one source. There is the possibility that the AVC under a default process purchased an Annuity offered by the same provider.
This is a service provided for existing clients, although at some stage they will need an official translator to translate the documents into Spanish if the UK provider will not do so.
In some instances though, either because of a lack of understanding by 3rd parties ie. the Hacienda or a Gestor, some people are claiming their pension income from a QROP/ SIPP as a temporary annuity whilst still retaining control over the investment and have not actually used cash to purchase an annuity ie it is still a pension in drawdown.
This is incorrect and will be explained why in a later article. Further articles will also include “The Treatment of Small Pension Pots”, “Pensions Flexibility” and “Pensions in Drawdown”. What I have learned time and time again over the course of many years experience in the pensions industry is that the “Devil is always in the detail” and why a pensions audit is vital.
As Financial Advisers we are not professional tax advisers, but we work closely with said professionals, and in this instance the tax advice has been provided by HCS Accounting of Denia
What are the main financial risks as an expat in France?
By Spectrum IFA
This article is published on: 29th September 2015
Age and wealth are often linked. One increases inexorably in a linear fashion, and the other tends also to increase over time, but always in a non-linear way. Following this traditional route, we tend to become more affluent as we get older, barring financial mishaps and accidents of course. This may have something to do with the notion that as we get older we become wiser. That may well also be true up to a point, but then it can occasionally go horribly wrong. Leaving that unfortunate possibility to one side, how can we expats best contribute to our own financial well-being?
All a bit deep that, but here is what I’m getting at. If I were to attempt to present a snapshot of my average client to you, it would be of a couple in their late 50’s to early 60’s who have retired early after successful careers and family building, based either on employment or their own business. Avid Francophiles, they are now ‘living the dream’ funded by the fruits of their former labours. All is well in their world; or at least that is how it appears on the surface. Underneath though, there are concerns, and these concerns are common to all of us. Age and money.
I think very few of us actually like getting older; I certainly don’t. It is becoming more and more difficult to ignore those ‘milestone’ anniversaries. I think of them more as millstones these days. As I suspect is the case with many of us, I tend these days to look my accumulated ‘wealth’ (cough), and wonder if it will last me out. I think it will, and I certainly hope it will, but I’m pragmatic enough to realise that it isn’t a ‘gimme’ (in Solheim cup parlance).
So then I start to look at the variables. What can possibly go wrong? What can I do to defend myself against the risks? What are the risks? I am after all a financial adviser; all this should come naturally to me. To an extent it does, but knowing what is out there doesn’t mean that you necessarily know how to beat it. It does help though. Here is my top three on my list of risks to worry about:
Institutional Risk – Basically this means that you put all of your money under the floorboards in the attic, but next year your house burns down, floorboards and all.
Market Risk – How could putting all your money into VW shares possibly go wrong?
Exchange Rate Risk – This is where Murphy’s Law comes into play. Whatever the rate is; whatever you do will be wrong. Otherwise known as Sod’s Law.
Obviously, it is a good idea to work on avoiding these risks wherever possible. I thought long and hard before listing them in this order, but I do think that Institutional Risk stands out. After all, it can wipe you out completely. It can also be avoided completely. The other two cannot be eradicated, although some would argue about F/X risk.
Indeed there was a time when I would have argued that F/X risk can be avoided. In a former life (I’ve told you this before I know), I used to be a foreign exchange dealer in the world of international banking, before it became unfashionable. One of my jobs was to explain to corporate and private clients that F/X risk was the enemy, to be identified and eliminated at all costs; unless of course your job was to make money trading (gambling) in it.
Ten years ago I brought this dogma into my new career as an IFA in France. How long do you intend to stay in France? (forever). Where are your savings? (in the UK, in sterling)… Over the years, the subtleties started to emerge. The collapse of sterling against the Euro; the resulting exodus of thousands of UK ‘snow birds’ from Spain because their UK pensions wouldn’t support them anymore, and the growing realisation that our old enemy ‘age’ was always going to play its trump card; they all contributed to the much changed conversations that have with my clients these days. Strangely though, it is another banking term that now dominates my thinking, namely hedging. ‘Hedge your bets’. To be honest, I tend to question anyone these days who says that they will never return to the UK. Statistics show otherwise. We tend to base our current view on our current circumstances, preferring not to think about what will happen if we end up on our own. How many UK expats are there, I wonder, in French care homes?
Since the Euro came into existence the £/€ exchange rate has been as high as 1.7510 and as low as 1.0219. In anyone’s language that is an enormous range. Coincidentally we currently sit at almost exactly the half way point between those two extremes, but I don’t see that as any reason for complacency. We need to take this risk very seriously, especially if we accept the possibility that we will one day have no more use for Euros. I have a firm view on the best way to manage this risk, but I’ve run out of space in this edition. If you want to discuss it, you know where to find me.
Why a Pension audit is vital for your wealth Part 1
By David Hattersley
This article is published on: 25th August 2015
I have been trained in the UK and have been specialising in Pensions since 1987. As well as keeping up to date with the subsequent (and numerous) changes in legislation, I also have a good understanding of the variety of pensions offered since then. In this article I am concentrating on Pre-Retirement Planning ie. those people that have yet to take their pensions. With ever changing careers in private industry and the end of the idea of “jobs and pensions for life”, which was part of the revolution in the late 70’s, most people acquire a number of pensions and different types of pensions over a period of 30 to 40 years. In some cases, they are not even aware of their entitlement, in particular, Defined Benefits Schemes to which the rules changed from the late 80’s (my Father in Law being a case in point who was not aware he was entitled to benefits under such a scheme until well into his retirement) and Contracting Out of SERPs plans.
Since the Finance Act of 2004 pensions have come under that legislation. The general wording of this legislation was “Pensions Simplification”. As advisers at the time, we knew full well that this would not be the case and we have been proven correct, with the subsequent attacks on pensions by a variety of governments seeking to raise revenue and reduce tax advantages at the same time.
Since moving here to Spain, I have come across many clients who were not aware of the benefits that they were entitled to. It has required a vast amount of work tracking down both providers and employers that no longer exist. In some instances it has proved to be fruitless, but others have benefited from plans that they are not aware of. That is the first stage of my role as a Financial Adviser, which is to question a potential client’s work history and seek full details. That however is the easy bit as the options available at retirement have been given greater flexibility, but the irony is that independent advice is hard to come by in the UK unless you are prepared to pay a fee on a time cost basis.
The first question is, do you plan to become tax resident in another European country? For those that plan to still maintain a home in the UK (even as a holiday home), that is further complicated by ever changing rules regarding residency in the UK vs tax residency in the chosen country.
What do you need to do before you leave the UK and become tax resident in an EU country? A simple question perhaps, but the tax free lump sum available in the UK now referred to as “Pension Commencement Lump Sum” or PCLS (one can see the tax free status of that being restricted in the future) is liable to be taxed certainly in France and Spain once you become tax resident. There are legitimate rules reducing this, but once again, these need advice. How does one therefore get your PCLS to take advantage of the current UK tax free status, without having to take the pension too? Perhaps you want to stagger your pension income as a result of continued part time work or “consultancy”. Many of my generation want to still work past normal retirement age, but at a slower pace.
Currency also has an impact, within the last 5 years the £ to the € has gone from 1.07 to 1.42 Euros. If one thinks that will be maintained, consider that in 2002 when the Euro was launched the £ to Euro was as high as £1 to 1.56 Euros. The impact to those that budgeted on that basis over the ensuing 8 years was detrimental to their wealth, so how does one hedge against currency fluctuation?
Does all your pension come from a UK source or have there been earnings and pension entitlements from overseas employment? Do you have a mixture of Final Salary schemes and personal money purchase pots? Is there a need to consolidate these, or treat each individual arrangement on its relative merits?
With recent legislation, trustees of Final Salary schemes (Defined Benefits), with the exception of transfers less than £30,000, now need the involvement of a fully qualified UK financial adviser who has passed his recent exams. This is all very laudable but how can that adviser be aware of the tax rules in your new country of residence? In any analysis carried out by a Spectrum Partner, it is vetted and checked by a Spectrum Fully Qualified Chartered Financial Planner, and if need be by a UK Financial adviser if part of your pots are as above. It is important to note that no UK Government funded pension eg. Civil Service can be transferred.
Then there is the reduction in the Lifetime Allowance, the passing of your pension pot to your chosen heirs and beneficiaries, the correct selection of good quality properly regulated funds and fund managers dependant on an individual needs, regular reviews as needs change, and the changes to the amount one can take on an annual basis due to recent pension flexibility rules. These are all areas that are vital to consider.
Even after the audit, and a decision to potentially transfer part or all of one’s pots, care needs to be taken in the selection of the QROP/SIPP Trustee and the jurisdiction that it comes under.
Having mentioned the above it may be in some cases that not all your pension pot should be considered for a transfer.
It may be beneficial to consider the purchase of a Lifetime Annuity from a UK provider as these have substantial tax advantages over pension payments in Spain. This will have to be carried out before one moves abroad on a permanent basis and, as stated earlier, for every potential client advice is given on a case by case basis.
In many cases, a lifetime of pension saving can result in funds being equal to or greater than the value of a property purchased abroad. Should one not take the same planning, care, advice and due diligence when planning your retirement for an income that may have to last 30 years? That is where we can be of help.
QROPS – Qualifying Recognised Overseas Pension Schemes
By Spectrum IFA
This article is published on: 4th August 2015
I’d like to revisit the topic of pensions this month; specifically QROPS pensions. I’m sure you remember that it stands for Qualifying Recognised Overseas Pension Schemes. I spend a lot of time talking to clients these days about QROPS. I don’t want to bore you with loads of technical detail here; I want to concentrate on the core reason why you should consider a QROPS if you are non UK resident or are considering becoming so. Much has happened this year in the UK pensions industry, and it has tended to cloud the picture regarding expats and their retirement savings. Let’s try to regain some clarity.
If you’ve moved to France, or are considering a move here, you need to at least consider a QROPS as an option. It gives you the right to move your pension fund out of the UK jurisdiction altogether, and have much more control over your pension pot, and protect it from internal taxation and other forms of interference from the UK system which is focussing more and more on how to tax your assets.
I’m talking to a client in this position at the moment. His name isn’t Steve, but we’ll call him that anyway. He has a £400,000 pension pot made up of four different pensions accrued over his working life. He and his wife are UK resident, but intend to be French resident soon. I’ve given him all the background information, and he has come back with a very succinct question:
‘I think it quite likely that I will live in France for many years, but equally likely that I will return to the UK at some stage in the future. As my pension will revert to UK jurisdiction when that happens, is it worth my while paying the overseas trustee fees while I am outside the UK?’
Steve is 65 years old, and he thinks he will return to the UK when he is 80. Let’s also assume a modest net return of 5% per annum of the QROPS pension. This of course cannot be guaranteed, but is the current performance of my preferred investment fund over the past 5 years. Let’s assume that he decides to do a QROPS transfer.
Now let’s move forward in time by 10 years. Steve’s pension fund is now worth £550,000. (the mathematicians amongst you will of course realise that he has been drawing down some of this pension to supplement their other sources of income) He’s quite pleased with this, but would be less pleased to learn that in two weeks’ time he will be killed in a tragic car accident.
As tends to happen in later years, Steve and his wife had discussed what they would do if one of them died. Steve thought that if he was the one left, he would stay in France, but his wife, we’ll call her Jane, thought it more likely that she would go back to the UK to be with the children and grandchildren. This is indeed what Jane decides to do, and to facilitate this, she decides to take the full pension pot as a capital sum to enable her to buy a decent house back in Cambridge. She will invest the proceeds of the sale of the French house when, and if, it sells.
Because Steve decided to transfer under the QROPS system out of the UK pension jurisdiction, Jane will get every penny of the £550,000 pension lump sum. If Steve’s decision had gone the other way, and he had decided to keep his four pensions in the UK, Jane would be looking at a tax bill from HMR&C of 45% on the majority of the money if she took it as a lump sum. Her tax bill would be in the region of £210,000 at current rates.
There will have been additional costs in having a QROPS pension, principally to remunerate the overseas trustees who take on responsibility for the administration of the pension under HMR&C rules. There will also have been savings. UK pension funds are subject to UK Dividend Income Tax. The rebate of the 10 per cent credit (ACT) was withdrawn by Gordon Brown, costing pension funds billions in tax.
It is therefore difficult to quantify how much extra a QROPS costs, if anything at all. What we can say with a fair degree of certainty is ‘not as much as you might think’. In Steve’s case it probably cost about £9,000 over the ten years in trustee costs, but £8,000 of this was recovered immediately when he invested his pension money into the QROPS bond. That doesn’t happen with all QROPS, but it can currently with Spectrum.
As far as insurance goes, and I regard this as an insurance policy for while you are abroad, the cost/savings ratio looks pretty impressive. I always practice what I preach; my own pension fund is safely housed in two separate QROPS, well away from the UK tax–grabbers.
With regard to the changes that have erupted on the UK pensions scene this year – Pension Freedom – as the chancellor likes to call it; I think my views are well documented. I see this as a tax raising scheme, nothing more and nothing less. It may be that in the future QROPS schemes will be forced to fall in line with the new UK stance, but that has little to do with the many compelling reasons to look at a QROPS transfer.
QROPS is one of the topics that we will be featuring at our next ‘Le Tour de Finance’ seminar. Our industry experts will be presenting updates and outlooks on a broad range of subjects, including:
- Financial Markets
- Assurance Vie
- Pensions/QROPS
- Structured Investments
- Currency Exchange
The date for the seminar is Friday, 9th October 2015 at the Domaine Gayda, Brugairolles. Places are limited and must be reserved, in advance. This venue is always very popular and so early booking is recommended. Please complete the reservation form here
You can’t please all of the people all of the time
By Spectrum IFA
This article is published on: 11th June 2015
It’s a sad but true fact that you can’t please all of the people all of the time. While most of us dance a little jig each time the sterling pops its head over the 1.40 mark (however briefly!), others wince and reach for their calculators, working out how much less they are now worth in sterling terms. For various reasons, as we have discussed before, people decide to ‘go home’. The very fact that they describe it in those terms probably makes them all the more likely to take that decision in the first place, but the fact is that the older we get, the more compelling the argument can become to return to our roots.
There are currently two main problems for those who come to that decision today. The first is the exchange rate, and the second is the housing market. How unfair is it that many of us came to France on the back of a strong pound, then congratulated ourselves when it collapsed, only to find that when we need it to stay weak, it bounces back to bite us where it hurts? And, to compound matters, our cherished piece of French real estate turns out to be worth a fraction of our own valuation. I don’t think this is particularly a French issue though, unless we (surely not?) were persuaded to pay more than the property was worth in the first place. I learned many years ago that if you think you might want to move home at some time in the future, plan ahead. Don’t wait until you want/need to sell and bide your time. Advertise early, and wait for that elusive buyer who really wants to buy your home. Easier said than done though, I must confess, although I have in the past been successful in selling a ‘quirky’ house on this basis, and buying a much more sellable property, purely to put myself into a more flexible situation where I knew I could move quickly if I needed to. Even then some ego inflated politicians started a war and held up our move to France for quite a few months.
No, you can’t please all the people all the time, but what you can do is try to give them the best advice at all times. If you get that right, then major upheavals such as moving back ’home’ can be made less of a trial. A good example is investment advice. I estimate that currently around 5% of my clients are in the process of moving back to the UK, or are thinking about it. I know for a fact that all of them are happy that they took my advice to invest in what I class as ‘Expat Assurance Vie’ policies. I call them this because I know full well that they are designed for and aimed at the expatriate market in France. One major advantage is that they are completely portable. It is easy to convert the policy to a standard UK investment bond. You could even have stayed invested in sterling, but if you had switched to Euro, you can switch back. If the current exchange rate deters you, there is nothing to stop you going back to the UK with your investments still in Euros, to be converted when the rate goes back down (as it surely will).
In part I blame social media for this new type of expat existence. Originally, when you moved abroad, you kept in touch by mail. Good old fashioned post. If something of note happened, either abroad or in the UK, you would write to your family and tell them about it. If it was very urgent, you’d phone, but that was expensive. Nowadays little Jimmy in Tonbridge Wells starts teething and the whole world knows about it in minutes. Don’t get me wrong, I’m not a complete dinosaur when it comes to these matters. I have a Facebook page! But I don’t really know how to use it though. I’ve never found my ‘Wall’, and I’ve never enjoyed being poked. As for Twitter, I’ve never understood the rationale behind it, never mind how to use it. I thought retweeting was military code for a strategic withdrawal.
I suppose it all has its uses, but it makes the world a more volatile place. Sometimes you can just have too much information. Sometimes it’s better to let someone else take over and do ‘stuff’ for you.
Maybe a financial adviser for example…
What is QROPS?
By Spectrum IFA
This article is published on: 23rd April 2015
Download your QROPS Guide
A QROPS (Qualifying Recognised Overseas Pension Scheme) is an overseas pension scheme that meets certain requirements set by HMRC and follows the same standards or equivalent as a UK pension.
Most expat UK pensions can easily be transferred into a QROPS, as long as the overseas scheme is registered with HMRC and is fully compliant with the standards of the jurisdiction it is domiciled in. QROPS’ profile was increased after HMRC introduced a series of new pension rules on 6th April 2006.
• Putting your pension into a QROPS will give you a greater level of control over the way your pension fund is invested. You can consolidate a number of different pensions into one QROPS pot and you will not have to buy into an annuity.
• QROPS will also let you bestow the rest of the fund to your beneficiaries without any deduction of UK tax upon death, as long as you have spent five years or more living outside the UK.
How secure is your pension? The global recession and credit crunch have created a lot of concern about investments. And for most people pensions involve very large investment decisions. You could already be receiving a pension income, but is it working hard enough for you? Or are you one of the many people with a deferred pension. There can be risks involved, even with final salary schemes. Falling stock markets and increased life expectancy have put a great strain on these schemes with most being closed to new members. We recommend that all expatriates with a UK pension review their fund carefully, and consider all the options. Particularly as non-residents have the opportunity to move their UK fund to an international pension.
What is an International pension? New UK legislation has created international pension products known as Qualifying Recognised Overseas Pension Schemes(QROPS). In essence, QROPS must mirror the UK requirements for pension commencement lump sum and income benefits. HM Revenue & Customs (HMRC) will only allow overseas transfers to schemes that have an official QROPS status. Careful consideration needs to taken when considering a transfer, as HMRC are aware of some jurisdictions promoting the scheme as a blatant way of tax evasion (ie Singapore, which was delisted by the HMRC in 2008).
We work closely with the authorities concerned to help our clients be placed in the most appropriate jurisdictions.
So what are the benefits of QROPS?
• Potential freedom from UK tax upon death, even after the age of 75 (Finance Act 2008)
• Transfer of the fund to future generations upon death with the potential avoidance of current UK tax charge on residual fund. If the member is over the age of 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income 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.
• Flexibility to access funds at any time between the ages of 55 and 75.
• Access to income and capital without deduction of tax.
• No deduction of tax at source. However, taxation may apply in the member’s jurisdiction of tax residence.
• Reduction of currency risk by transferring the funds to Euros, for example if a client lives in Europe and will be spending Euros in their daily lives.
• No requirement to buy an annuity
Example when QROPS is a good idea
A Client is aged 65 and lives in France and has done so for more than 5 full UK tax years.
The client has no intention to return to the UK.
The client wishes to take the maximum Pension Commencement Lump Sum (PCLS) and immediately draw an income from the remaining pension fund.
The existing UK pension scheme is a Money Purchase Scheme and does not have any guarantees attached to it. The client is being charged 1% per annum plus annual fund management charges by their UK provider and the pension has a transfer value of £200,000.
In the event the client passes away they wish their pension fund to pass as a lump sum to their spouse. Were they to pass away after age the age of 75, the fund would be subject to a 45% UK tax charge before being passed on to their widow/widower. (from 2016 both income or lump sum benefits would be taxed at the beneficiary’s marginal rate of income tax).
Following a detailed analysis of their UK scheme, including the cost and tax implications, the client decides to go ahead with a transfer under the QROPS provisions to a Malta registered and recognised provider.
The QROPS costs are £645 for the set up fee and £845 per annum (in some cases these fees can be less).
The investments are administered for a cost of 1% per annum plus annual fund management charges.
The client receives 30% of their pension pot as a PCLS, which is taxed in France at a rate of 7.5%. Had the client left their pension in the UK, they would be able to take only 25% PCLS and it would still be taxed in France. He then draws an income of 150% of UK GAD rates, which is paid to them gross by the Maltese QROPS provider, as Malta has a Double Taxation Treaty in place with France.
Then they declares this income on his French Tax return. The funds used in their portfolio are all purchased without initial charges or commissions.
These funds are all daily traded and none are subject to any penalty charges if they are sold. The funds purchased to provide income are managed by some of the very top investment houses in the business; for example, BlackRock, JP Morgan Asset Management , Jupiter Asset Management, Kames Capital and Henderson Global Investors.
Cons:
• The additional costs are only the £645 set up fee and an £845 annual charge.
Pros:
• The client has been able to withdraw an additional 5% of the fund as a PCLS. • Upon death the client’s pension pot will pass in its entirety to their widow or widower. • The client is able to mitigate potential currency risks. • Increased Flexibility (i.e. a normal Personal Pension Plan does not allow drawdown) • Consolidation of pension plans making them easier to manage
Example when QROPS is not a good idea
A client has a Section 32 pension. • The client is coming up to retirement age, they do not live in the UK and have no plans to return.
• The client’s main requirement is a high income and as they have no children they are not so worried about the death lump sum.
• Having analysed the pension we find out that it provides a Guaranteed Annuity Rate (GAR) of 8.7% per annum for life. (Note* this is not the case with every Section 32 pension).
• Our view is that this is a very good income rate, especially when compared to current annuity rates which are very low.
• Transferring to a QROPS would mean this GAR is lost and then any future income will be based on normal income drawdown rules.
Therefore we recommended that this particular client should leave the pension where it is in order to enjoy this high guaranteed income rate.
Our advice would not always be the same for every client as there would be restrictions to when annuities could be taken, the spouse’s benefit would have been minimal and there also would be no death lump sum for any other beneficiaries. So this solution would not be ideal in every case.
A client’s aims and objectives will drive the advice as for some people it may have been better to transfer this plan. This is why we fully review each individual pension plan and discuss with our clients what the benefits are, what the options are and what might be best for them depending on whether they require a higher lump sum, higher income, better spouse benefits, better death benefits for children, require income earlier than age 60, as many GARs are only applicable at age 60 etc.
The importance of each factor will vary depending on whether a client is married, has other income or cash available, has children, whether they are divorced and re-married, their risk profile etc.
Other reasons not to transfer:
• Fund value below £50k – expense ratio too high.
• Final Salary – the client wants the stable income with inflation increases and is happy for the pension to stop on the death of both the client and their spouse.
• Guarantees attached. – The pension has a Guaranteed Annuity Rate (GAR) or Guaranteed Minimum Pension (GMP) – i.e. the annuity could be in the region of 8-10% for life or the client could have a guaranteed income which is also in this region. (although with the latter the fund growth can increase to make the guaranteed income less attractive, you don’t know until retirement date, with the annuity you always get the % so if the fund goes up the % stays the same.
• The pension has an enhanced lump sum.
Changes to UK pensions: how will they affect you?
By Spectrum IFA
This article is published on: 14th April 2015
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.