The Brexit or Invoking the Law of Unintended Consequence.
By David Hattersley
This article is published on: 28th October 2016
Since the Brexit vote most news has been about potential Trade deals, and Sterling’s fall. However it perhaps has gone unnoticed, that from a variety of differing scenarios with outcomes by no means certain, a Constitutional crisis could be gathering steam.
It all stems back to the European Referendum Act 2015, that didn’t consider the variety of outcomes and was legally non binding. In addition, the power of the Royal Prerogative that was curbed when King John signed the Magna Carta in 1215 is being used by the Government, and in essence his successor Theresa May, to make or break treaties with other countries including the EU, in this case invoking Article 50 without the need for it to be passed into law via an Act of Parliament.
Critics of this say that the 1972 Act (based on the UK joining the Common Market) ceded power from the UK Parliament and allowed EU law to pass into UK law. This gave the British people protection under a new constitution based on EU law (based on Napoleonic Law). The UK has never had a written constitution that protects it citizens and gives them certain rights. It is being argued by a variety of bodies via legal challenges against the PM for using the Royal Prerogative to take away rights bestowed to Parliament. Some go as far to say “enforced removal” of citizenship rights from 65 million people would be “completely unprecedented “in modern democracy. Expat campaigners are also arguing that the “rights enjoyed by British citizens beyond these shores are so fundamental that legislation is required to take them away”.
The legal challenge has been mounted to the process of withdrawing the UK from the EU without a vote in Parliament and is going to the High Court, to be heard within the next two weeks. If the government lose due to Judges imposing their will (note unelected!), it would then be ironic for this eventually being heard by the European Court of Justice, the UK’s next step .
If the UK government win this current legal challenge on the basis “ Respecting the outcome of the referendum and giving effect to the will and the decision of the people “, that too could lead to further challenges for whom the right to vote was taken away i.e. a large percentage of Ex Pats and those Europeans citizens in the UK.
Additionally, working on that basis could give credence to Scottish Independence should they have a 2nd referendum and vote to remain in Europe. The same could be said of Northern Ireland, which has its own Parliament as well, and perhaps even Gibraltarians, as they overwhelmingly voted to remain.
The other major crisis in the making is the “Great Repeal Bill” debate that is due to be put to the House next year. A number of scenarios could occur. Many M.P.’s supported remain and the government still has deep divisions within its ranks. With only a majority of 10 seats in the House, a loss could force a vote of confidence, an early election, and a greatly disenchanted and potentially a disenfranchised electorate that voted to leave.
If they win then it passes to the House of Lords, who overwhelmingly wished to remain in the EU, and should they vote against it, take note Leave campaigners, an unelected body voting against the wishes of the majority!!
The Law of Unintended Consequence reigns supreme, or quite simply chaos. It makes Spain’s recent political turmoil insignificant, and I wonder how many of those that voted to leave or indeed did not vote at all, would have wanted these potential outcomes.
What would be even more ironic would be that the UK Government, in its current format, with many of the Ministers that supported the Leave campaign in positions of power, having to go to the European Court of Justice to overrule either singularly or both the UK Judges or the House of Lords to push through the Brexit, whilst at the same time preside over the breakup of the Union.
Dread and Brexit
By John Hayward
This article is published on: 24th October 2016
Fear causes thousands to hold off making decisions pre-Brexit
Uncertainty over what will happen once the UK has left the European Union has led people to make one important decision. Not do anything until it happens. This means delaying actions for around two and a half years. This could be a really disappointing, if not dangerous, decision to make. As much as we intend being around in two and a half years, there is no guarantee we will be. Who knew two and a half years ago what was going to happen next week?
Brexit is another event in our lives. None of us, not even the politicians, know exactly what is going to happen but you can plan for all eventualities. If there is a full-on Brexit, then you need to be in a position whereby your money is not exposed to future monetary restrictions. You need to do this BEFORE the shutters come down. Waiting two and a half years may be too long and too late.
If there is a “soft” Brexit, as I suspect there will be, with deals being done over a gin and tonic in Le Chien et Le Canard, it will still be important that your investments are recognised as being tax compliant in the country you live in. It will also be important that any financial planning advice you are receiving is coming from a company registered in your country. Some financial advisers in Spain are allowed to operate using a UK licence because the UK is in the EU. The professional indemnity insurance which they (may) have could become invalid.
Another change likely to cause a big problem post-Brexit is Spanish inheritance tax. UK inheritors are benefiting from Spanish rules introduced in 2014. These rules only apply to EU residents. Therefore, it is now time to look at how to distribute wealth in readiness for these changes.
Interest rates are low and will stay that way for some time to come, probably for at least two and a half years. The pound has collapsed in value meaning that income in euro terms has reduced dramatically. Banks have little or nothing to offer. We can help you with this NOW. We do not charge for a chat, or even for investigating what you have. We tick all the boxes regarding licences and compliance and we live in Spain.
For Brexiteers and Remainers alike
By Gareth Horsfall
This article is published on: 17th October 2016
It was only a matter of time before I got onto the subject of Brexit once again. I have been trying to avoid it like the plague and certainly will refrain from offering any views in this article.
However, I do want to inform you about some very important developments for UK citizens who are living in Italy.
Since Brexit, it has become apparent that whatever stance you took at the vote, that UK citizens living in Italy may very well lose the right to universal access to healthcare, pensions, the right to acquire citizenship and running a business. Equally we may lose the right to freely move across other European states and we will almost certainly, the ways things are presently moving, lose the right of permanent residence in Italy without a permesso di soggiorno.
I am certainly worried about all the UK negotiations with the EU and whether you voted for Brexit or not and/or if you are a resident in Italy or intend to be, then they will surely affect you. One way of getting round this is to try and attain cittadinanza, (you can find out how , HERE. The page is in Italian!) if you are eligible. The other way is for us to try and get our rights as UK citizens, who are already living in and resident in Italy, recognised by either the UK and/or Italy.
In France, Spain, Belgium and Germany there are big movements afoot by politically inclined and connected individuals who are writing to their respective EU states and negotiating with them on behalf of all UK citizens already living in these countries and the rest of the EU.
Here is a little of what they say:
Brexit should not have a retrospective effect on individuals. UK citizens currently resident in the EU and EU citizens currently resident in the UK should be expressly treated as continuing to have the same rights as they had before Brexit. This is not confined to a right of continued residence but extends to all related rights such as the acquisition of citizenship, the right to continue to work or run a business, the right to healthcare, pensions etc.
These citizens from both sides of the Channel all made their decisions on where to live and work in genuine and reasonable reliance on the UK’s membership of the EU. Whatever the rights and wrongs of that membership, it cannot be right for millions of people to have their lives turned upside down when that could easily be avoided by a mutual agreement that the status quo prior to Brexit should continue to apply to this group.
Rumblings in Italy
I am happy to say that, in Italy, there is now a similar group of people who are campaigning to represent UK citizens in Italy. They are a UK/Italian solicitor based in Rome, retired barristers and journalists who are aiming to gather recognition in the UK, and in Italy, at a political level and fight to retain EU rights for UK citizens living in Italy.
The subject of this E-zine is to spread the word of this to as many British people living in Italy, or intending on moving to Italy, as possible.
They have a Facebook group. If you are interested in ongoing developments they will be posted regularly on their page. You can ‘Like’ it from the link below. And don’t forget to send this link to as many other UK citizens living in Italy, as you know.
https://www.facebook.com/UKcitizensinItaly/
(If you are unable to join this group, or do not use Facebook, then you can register your presence with the group at their email address: britsinitaly@gmail.com. You may also contact them if you have any specific skills or contacts, or want to get involved in some way).
The group is closely affiliated with www.britsineurope.org who are a group of UK citizens living in Berlin and who are fostering co-ordination between the various groups around Europe.
It would appear that this group of people in Italy are the ONLY group which is actively campaigning in Italy and ideally it should stay this way. A lot of the campaigning will have to be directed at the Italian government and we all know what a headache that can be. One focal point will be a useful way of making contact with you, when required, and also informing the group of any hurdles you may be facing already, or start to face, as a result of Brexit.
The group is an open group, subscription free, and welcomes any ideas, comments or information you might be able to offer.
Please spread this onto as many UK citizens in Italy as you may know and ask them to sign up to the Facebook page, if they have the possibility to do so. Otherwise I will, as usual, be updating you with ongoing developments here. I am in regular contact with the group of individuals mentioned above and will aim to send out messages when necessary, alongside my usual ramblings.
This has been more of a public service notification than one of my usual E-zines but I hope you are reassured that there are people out there who have the ability and connections to try and make our life easier in Italy, depending on the outcome of the Brexit negotiations.
I have a long term relationship with a UK regulated financial adviser, why should I speak to French regulated one?
By Amanda Johnson
This article is published on: 14th September 2016
Many of us have banking and financial services relationships from the UK and whilst you may feel a financial review now you are resident in France isn’t urgent or important the benefits can be enormous. A full financial review can be free and you should always ask what costs are applicable to any consultation you arrange. Some of the benefits include:
Capital Gains Tax – Certain tax efficient savings and investments recognised by HMRC would not qualify under French taxation, leaving you with a tax bill on the gain element.
Inheritance Tax – UK inheritance tax planning is very different to that in France and even though you can opt to have your UK will recognised in France, tax on your estate will be based on French tax rates and laws.
Compliance with the French tax system – Knowing how and when to declare your investments and savings can avoid financial penalties for non-disclosure.
It is very important to remember that whilst your UK financial adviser has been of great service whilst you were resident in Great Britain, if they are not trained and regulated in the country you now live the French authorities will still expect your financial affairs to fully comply to French laws and this may mean you are presented with an extra tax bill for any non compliance.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Tin Hat Time at the FCA
By Derek Winsland
This article is published on: 1st August 2016
In the wake of the fourth Parliamentary Review into the Financial Conduct Authority and its handling of high-profile incidents, comes the latest criticism from the Financial Services Complaints Commissioner who accuses the FCA of “an unwillingness to face up to and address its shortcomings”. He went on to say he had seen a tendency at the FCA to find reasons for excluding cases from the complaints scheme in circumstances where they should not have been excluded. Oh dear, smacks of Big Brother getting too big for his boots and believing itself to be above the law?
It is currently squirming with embarrassment over the antics of Sir Phillip Green and the BHS pension scheme, and this is fostering the belief in the industry that it is too focussed on the advisory sector and overlooking the problems that Pension Freedoms is having on occupational pension schemes, especially Defined Benefit (DB) or ‘final salary’ schemes.
You will no doubt be aware that the legislation passed in April 2015 relaxed the rules over how benefits could be taken from pensions. Gone was the insistence that a “pension is a pension – its job is to provide your income in retirement.” Although this is true, the old-fashioned rules take no consideration of lifestyle and personal choices. A casualty of this new form of thinking is the annuity, where you handed over your pension pot to an insurance company in return for an income for the rest of your life. A great concept except that the insurance company kept your money when you died. Under the new rules, you could use your pension pot to draw income off in retirement (or even before retirement now). This ‘income’ could be regular or ad-hoc in support of other income like state pensions for example.
Crucially, the new rules addressed the world in which we live and choose to live. An example of this could be where a member of a DB pension scheme (or a number of schemes over his/her working life) may decide on a change of career, to move to France to buy a property with an attached Gite to rent out. That is a lifestyle choice that perhaps suits that individual. Personal choice.
Under current (and out of date) FCA thinking, the default assumption is that it would not be appropriate for that individual to transfer the accrued benefits from such DB pension schemes, unless it can be proven that such a transfer is in that client’s best interest. How is this tested? Through the Transfer Value Analysis System or TVAS. Results are shown in the form of critical yields and hurdle rates. Sound complicated? You bet! Except it doesn’t allow for lifestyle choices or individual circumstances, which to the member are of far more importance. As advisers we’re told we must advise and inform the client of what’s in his or her best interest, even if it doesn’t gel with that person’s view. Believe me, those conversations are not easy. The FCA, meanwhile, sits in Canary Wharf, navel-gazing while all this is going on. The more cynical amongst us think the FCA has far more on its plate like finding ways to boost its coffers now it’s been told to stop bank-bashing and fining them for their latest misdemeanours.
There is hope on the horizon, however. The new chief executive of the FCA, Andrew Bailey has promised a greater focus on pensions, hopefully this won’t be an exercise in covering their backsides, but rather a genuine attempt to move with the times, providing much-needed and valuable guidance to the people they serve, the consumer. Let’s all hope that this is sooner rather than later and that the FCA doesn’t get distracted too much wrestling with the bear called Brexit.
If you would like more information on our view of how the investment markets are likely to play out into the future, ring for an appointment or take advantage of our Friday Morning Drop-in Clinic, here at our office in Limoux. And don’t forget, there is no charge for these meetings.
Concerns over effect of BREXIT on expat pensions
By Graham Keysell
This article is published on: 5th July 2016
The decision by UK voters to leave the European Union could have far-reaching consequences for pensioners living abroad.
This is especially the case for those receiving UK state pensions, but who are living in another EU member state.
The main uncertainty is whether state pensions will continue to benefit from annual increases.
As at September 2014 there were 1.24 million people receiving British state pensions but living outside the UK.
Approximately 560,000 expat pensioners live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the amount it was when they left the UK.
Is it going to be the case that British expats living in EU countries such as France or Spain will find themselves in a similar position?
Since 1955, pensions have been paid worldwide, but there was never any mention of annual increases.
However, in the period to 1973, reciprocal arrangements were made between the UK and 30 other countries, which allowed for annual increases to be paid in certain countries. This was seen as making it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.
Very few new agreements have been signed since, possibly because the EU rules meant that there was no need for them between EU countries.
Pension increases
Pensioners living in the EU, Norway, Iceland and Liechtenstein do get increases, but there is no guarantee that this will continue following Brexit.
Inevitably, the UK government will be tempted to save money by ending the increases to pensioners living in the EU.
It is already estimated that the Treasury saves around half a billion pounds a year from pensioners excluded from the increases. This could easily double if pensioners in the EU were to be treated similarly.
The number of overseas voters still on the UK electoral register is negligible, so the government might decide that upsetting these people would have a very modest negative effect. One result could be that more expats would get themselves back on to the UK electoral register (if it were possible for them to do so).
There is also the question of people who are planning to retire to a EU country in the future. They might show their dissatisfaction at the ballot box.
Another reason for the government might not stop the increases is the possibility of large numbers of pensioners living in the EU finding that they have no choice but to return to the UK
If access to free healthcare in the host country was also abolished, the UK government could easily find that significant numbers of pensioners return to the UK, which is a situation it would want to avoid.
For this reason, it is to be hoped that state pension increases will be paid, and there will almost certainly be considerable pressure on the government to find a way to preserve the existing system.
UK Inheritance Tax V French Succession Tax
By Lorraine Chekir
This article is published on: 19th May 2016
This is an area that many expats find very confusing: what and where to declare, what and where to pay, where to even start!
It doesn’t help that UK and France have completely different rules. In the UK the estate pays the tax and the net proceeds are paid to the beneficiaries. In France, the proceeds are paid to the beneficiaries. The beneficiary will then complete a Succession tax form and pay the inheritance tax, the amount of which is based on their relationship to the deceased.
What many expats do not realise is that if you are a French resident and inherit from someone who was a UK resident you need to complete and submit a French Succession tax form to URSAAF within 12 months of their death. No actual tax is payable in France as there is a tax treaty in place between the two countries.
Let’s look at a couple of different scenarios:
You are a UK resident and own a property in France. When you pass away your estate will be taxed in the UK on your worldwide moveable assets. However, your property in France will be subject to French inheritance tax.
If you are a French resident, when you pass away French inheritance tax will apply to your worldwide assets. If you still have UK assets, it may be that you will also pay some inheritance tax in the UK, however there is a tax treaty in place to ensure that you do not pay tax twice on the same assets.
Inheritance Rules:
In the UK the law says you can make a will naming whoever you wish as your beneficiaries. If you have not made a will, then the rules of intestacy apply and the distribution of your estate is based on these. If you have no living relatives, even long lost and distant, then everything you have will go to the Crown. Anyone born in Scotland would have some restrictions on who they could leave their estate to.
In France you cannot freely dispose of “la réserve” which must be held for your children. You are only free to dispose of as you wish the “quotité disponible”. A spouse is not a protected heir in France, however unless you specifically disinherit them, they are entitled to a quarter of your estate. The amount freely disposable from your estate will depend on the number of children you have.
- If you have one child they are entitled to half of your estate with half freely disposable
- Two children are entitled to two thirds with one third freely disposable
- Three children are entitled to three quarters with one quarter freely available
Since August 2015 it has been possible, in your French will, to adopt the inheritance rules of your country of nationality. This means if you are from the UK then you can adopt UK inheritance rules and leave your estate to whoever you wish. However, it is important to note this applies to inheritance rules not tax, French inheritance tax will still apply. I think this change in legislation will be of particular importance to people in second marriages with children from previous relationships and maybe from the current relationship also. For some reason, the UK and Ireland have chosen not to sign up to this change, which means if you are from the EU and living in the UK your estate will be subject to UK inheritance rules and tax.
Inheritance Tax Rates:
In the UK, the first 325,000 GBP of a person’s estate is free of inheritance tax. From the tax year 2017/18 if you have a family home that will pass directly to your children, then an additional allowance of 100,000 GBP will apply, rising to 175,000 GBP by 2020. This means that by 2020, married couples and those in civil partnerships with a family home to pass to children, could pass a total of 1m GBP free of inheritance tax. Inheritance tax in the UK is 40% of everything above your allowance.
In France, each person can leave 100,000 Euro to each of their children free of inheritance tax. Above this there is a sliding scale starting at 5% and rising to 45%. However as a guide, between 15,932 Euro and 552,324 Euro, the rate payable by the beneficiary is 20%.
For siblings, the first 15,932 Euro of what you leave them is free of inheritance tax, then they pay 35% on the next 24,430 Euro and 45% on everything else
Nieces and nephews can have just 7,967 Euro free of tax then pay a whopping 55% on the rest.
Everyone else (including non-married partners) can inherit a measly 1,594 Euro free of tax and will pay a massive 60% on amounts above this.
An important tax planning tool is the Assurance Vie. Providing it is set up before age 70, you can name beneficiaries and each beneficiary can inherit 152,500 Euro free of inheritance tax, amounts between 152,500 Euro and 852,500 Euro will be taxed at 20% and anything over this at 31.5%. As you can imagine, this could make a huge tax saving, especially for non-married partners, nieces, nephews and beneficiaries not related to you, with potential tax savings of up to 60%. The great thing is, it remains your money until you die which means you have full access if you need it, unlike when you put money in a trust in the UK to try and reduce your inheritance tax liability. In addition, it is the nearest thing the French have to an ISA as your money grows tax free.
If you want any more information or would like some advice, please contact me on the number or email below.
I also hold a free financial surgery in Café de la Tour in Les Arcs on the last Friday morning of each month where you can discuss your own situation in confidence over a cup of coffee.
This article is for information only and should not be considered as advice and is based on current legislation. 04/05/2016.
Company Pension/Final Salary funding update 31st January 2016
By Chris Burke
This article is published on: 8th March 2016
With most UK Final Salary schemes (also known as Defined Benefit) now closing their doors to new members, the schemes are concentrating on trying to manage to make sure there is enough money for those people still in them for retirement. This ‘closing of the doors’ also means there is no ‘New Money’ entering the schemes, which takes away the option of new contributions paying the pensions of those currently retired, as they used to. One of the biggest reasons for this, is that many years ago these often called ’Gold Plated’ schemes were made up on the following mathematics:
People retired at 55, then died at 67.
Thus, approximately 12 years of payments should they live to this point. However, now the mathematics are more likely to be the following:
People retire at 60, and the average life expectancy is 84 in Europe.
You don’t need to be a mathematician to work out why the schemes are faltering, and worryingly in many cases, heavily reliant on their companies contributing millions of pounds to keep them going.
The Pension Protection Fund (PPF) takes these schemes under its wing should the company scheme get to a point that it cannot realistically recover from poor funding. However, it is gaining more and more ‘members’ and will only cover pension income up to a point. Therefore, many client’s believe it is better not to be in the PPF if possible, and have your pension under your own control and in essence not at the mercy of a government body to bail you out. People thought that the Kodak pension scheme would always be ok; unfortunately it was not and left a lot of people with no or little pension benefits.
Below is a transcript of the update from the Pension Protection Funds own website updating what has happened and why. If you have any questions regarding this or what your options are, don’t hesitate to contact Christopher, the article writer (contact information is at the bottom of this article).
Update from the Pension Protection Fund (PPF) of its members
The aggregate deficit of the 5,945 schemes in the UK Pension Protection Fund (PPF) Index is estimated to have increased over the month to £304.9 billion at the end of January 2016, from a deficit of £222.4 billion at the end of December 2015. The funding ratio worsened from 84.9 per cent to 80.5 per cent. Total assets were £1,258.7 billion and total liabilities were £1,563.6 billion. There were 4,923 schemes in deficit and 1,022 schemes in surplus.
The aggregate deficit of the schemes in the PPF 7800 Index is estimated to have increased to £304.9 billion at the end of January 2016, from £222.4 billion at the end of December 2015. The position has improved from the previous year, when a deficit of £367.5 billion was recorded at the end of January 2015. The funding ratio of schemes decreased over this month from 84.9 per cent to 80.5 per cent at the end of January 2016. The funding ratio is higher than the 77.6 per cent recorded in January 2015.
Within the index, total scheme assets amounted to £1,258.7 billion at the end of January 2016. Total scheme assets increased by 0.9 per cent over the month and decreased by 1.2 per cent over the year. Total scheme liabilities were £1,563.6 billion at the end of January 2016, an increase of 6.4 per cent over the month and decreased by 4.7 per cent over the year.
The aggregate deficit of all schemes in deficit at the end of January 2016 is estimated to have increased to £338.4 billion from £265.8 billion at the end of December 2015. At the end of January 2015, the equivalent figure was £392.6 billion. At the end of January 2016, the total surplus of schemes in surplus decreased to £33.6 billion from £43.4 billion at the end of December 2015. At the end of January 2015, the total surplus of all schemes in surplus stood at £25.2 billion.
The number of schemes in deficit at the end of January 2015 increased to 4,923, representing 82.8 per cent of the total 5,945 defined benefit schemes. There were 4,679 schemes in deficit at the end of December 2015 (78.7 per cent) and 5,175 schemes in deficit at the end of January 2015 (85.4 per cent of the 2014 population of schemes). The number of schemes in surplus fell to 1,022 at the end of January 2016 (17.2 per cent of schemes) from 1,266 at the end of December 2015 (21.3 per cent). There were 882 schemes in surplus at the end of January 2015 (14.6 per cent of the 2014 population of schemes).
Understanding the impact of market movements Equity markets and gilt yields are the main drivers of funding levels. Scheme liabilities are sensitive to the yields available on a range of conventional and indexlinked gilts. Liabilities are also time-sensitive in that, even if gilt yields were unchanged, scheme liabilities would increase as the point of payment approaches. The value of scheme assets is affected by the change in prices of all the major asset classes, not just equity markets. However, due to their weight in asset allocation and volatility, equities and bonds are the biggest drivers behind changes in scheme assets; bonds have a higher weight in asset allocation, but equities tend to be more volatile. Over the month of January 2016, liabilities increased by 6.4 per cent. Conventional and index-linked 15-year gilt yields fell by 34 basis points and 20 basis points respectively. Assets rose by 0.9 per cent in January 2016. The FTSE All-Share Index fell by 3.1 per cent over the month. Over the year to January 2016, 15-year gilt yields were up by 33 basis points and the FTSE All-Share Index was down by 7.9 per cent.
Pensions Back on the Government’s Agenda Again!
By Spectrum IFA
This article is published on: 4th March 2016
The date that is etched in everyone’s mind at the moment is 23rd June, when the referendum on the UK’s membership of the EU takes place.
However, if you still have pension benefits in the UK to claim, there is another date that you should be focused on – 16th March – the date of the UK Budget.
Last summer, the government launched a consultation on pension tax relief and this is what the Chancellor said ……….
“With increased longevity and the changing nature of pension provision, the government needs to make sure that the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement.”
Incentivising people to save for retirement? Well that’s not new. The current system of the tax-free Pension Commencement Lump Sum (PCLS) and tax-relief on pension contributions is already a good incentive, even though the latter has been capped and steadily reduced since 2006. So what more does the government think should be done?
The chancellor goes on to say ……..
“That is why the government is today publishing a consultation on pensions tax relief. If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.”
Now “simple” and “transparent” are not words that appear in my dictionary on the UK pension system. On the other hand, “complexity” does, particularly as concerns the new State pension system coming into effect in April, something that I will cover in another article.
The most radical idea that the chancellor floated was the introduction of the Pension ISA, where all pension contributions would be paid on post-taxed income, but thereafter, no tax would be payable – either on the investments in the pension fund or on the pensions in payment. Definitely attractive to a cash-strapped chancellor who wants to at least ‘balance the books’ during the remainder of this government’s term of office, but hugely short-sighted for future generations, when demographic pressure on public spending and the need for tax revenues is likely to be more severe.
The system would also be hugely complex as, in effect, two separate pension pots would have to be kept – the old system ‘post-tax pot’ and the new system ‘pre-tax pot’. Maybe the government would introduce some transitional arrangements to convert ‘post-tax pots’ into ‘pre-tax pots’ and if so, for sure there will be some losers. Costs for administering the new arrangements would increase and for the dwindling number of remaining defined benefit pension schemes, this could lead to these ending up in the ‘pensions graveyard’ – who will pay the levies to the Pension Protection Fund then?
An alternative idea proposed is for pension contributions to be paid out of post-taxed income and for a flat-rate of tax relief to be paid by the government into the pension pot or into the defined benefit scheme. If the tax-relief is limited to the basic rate of 25%, higher tax rate payers will lose out – some incentive!
The government’s current thinking on this to incentivise people is – ‘if you pay into your pension, the government will top it up’. This is spin, the tax-relief at source already exists for occupational pension schemes and a delay in getting the government’s so-called ‘top up’ into the pension scheme would be detrimental for the pension member.
The effect on the employer of defined benefit pension schemes should also not be underestimated, where the employer is legally obliged to ensure that the pension assets can meet the liabilities. Any delay on getting the tax-relief due into the defined benefit scheme is in effect, an interest-free loan to the government. My pensions career started more than 40 years ago and I remember well how long we had to wait for National Insurance rebates to be paid by the government into occupational pension schemes. Another nail in the coffin, on route to the pensions graveyard?
I save the ‘best’ to last – the abolition of the tax-free PCLS. Of course, I am being cynical because there is nothing good that could come out of taxing the beloved PCLS and definitely not the best way of incentivising people to save more for retirement. Receiving a tax-free cash sum has been at the heart of the UK pension system for decades. To take this away now, when people have saved for years and planned for retirement on the basis that they would receive this tax-free PCLS is quite simply wrong.
Of course, the government could just tinker with the existing system more by reducing the maximum amount that people can pay into tax-relieved pension funds and perhaps also by no longer allowing employers tax-relief on National Insurance contributions. The latter would hurt employers, particularly with the abolition of contracting-out of the State Second Pension from April, which anyway results in increased National Insurance Contributions (another nail in the coffin?).
The first organised UK pension scheme can be traced back to the 1670s, when the Royal Navy put in place provision for its officers. Other public sector pensions followed over the centuries, but it was in the 1950s and 1960s that corporate pensions became a prominent part of the remuneration package. In the good old days of easily understandable pension schemes, we were encouraged to pay Additional Voluntary Contributions – after all you got tax-relief and so were incentivised to save more for retirement. When I started work, the maximum amount that we could contribute was simply limited to 15% of earnings – regardless of whether you were a basic rate or higher rate taxpayer.
Do you trust future politicians not to change the UK pension rules again?
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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.