The biggest reforms to UK pensions in almost a century are underway. As more options become available, you need to understand how they affect you and consider what would work best for you in the short and long term.
The Government believes that individuals should be trusted to make their own decisions with their pension savings. From April 2015 pension scheme members aged over 55 with defined contribution schemes will be able to access them as they wish – there will be no restrictions on how much you can withdraw, you can even take the whole amount. For UK taxpayers, the first 25% will be tax free and the remainder at the individual’s marginal UK tax rate.
Expatriates in Spain need to consider the local tax implications. Besides Spanish income tax, note that funds withdrawn from pension schemes will form part of your estate for Spanish succession and UK inheritance tax purposes, so you need to plan for that.
Transfers out of private sector defined benefits pension schemes will still be allowed, up to the member’s normal scheme retirement date as opposed to within 12 months of that date. Further consultation will be carried out to determine the viability of partial transfers.
It will be a statutory requirement for such transfers to have been advised by a professional financial adviser who is independent of the scheme and authorised by the UK Financial Conduct Authority (FCA).
From 6th August, those aged over 55 can access ad hoc lump sums – “uncrystallised fund pension lump sums” (UFPLS) – from their existing schemes without moving into drawdown or buying an annuity. Each withdrawal is regarded as 25% tax-free cash and 75% taxed income, and your annual allowance will fall from £40,000 to £10,000.
Temporary rules were introduced allowing members to extract their full entitlement to a 25% lump sum while deferring the income until after April 2015 but (but before 5th October 2015). This allows them to take their pension under the flexibility rules.
The 55% death benefit charge
Under current legislation, when the balance of the fund is paid to your beneficiaries on death, there is a 55% tax charge if you are aged 75 or over, or if you have started taking benefits.
On 29th September Chancellor George Osborne announced that this 55% death charge will be abolished. From April, if you die under the age of 75 your pension pot will pass to your beneficiaries tax free, even if it is in drawdown. If you are over 75 years, your heirs will pay their marginal rate of tax; if they take it as a lump sum, a 45% fixed rate will he charged (though the government hopes to change this to their marginal rate from 2016).
Legislation will be introduced to enable product providers to introduce more flexible annuities.
The minimum pension age will increase from 55 to 57 in 2018 and thereafter it will be 10 years below the state pension age. This will not apply to certain public sector schemes such as the armed forces, police and firefighters.
From April annual pension tax relief will be limited to £10,000 for further contributions where benefits in a defined contribution scheme have been drawn.
The government recognises that the changes to the pension tax rules will have implications for the rules relating to Qualifying Recognised Overseas Pension Schemes (QROPS). It will consider these implications further to ensure that the rules relating to QROPS are appropriate when the new system comes into force.
There is no news on the suggested removal of, or change to, the lifetime allowance.
These reforms follow on from the transitional changes that were implemented from 27th March 2014.
The pension reforms are very welcome, but it is essential you understand how all the options work for you and weigh up what would be most beneficial for your circumstances and aims. The tax element in both Spain and UK plays an important part. Specialist advice is important to make sure you get it right.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 09th of October, 2014.