I was looking at some well-informed comment on Linkedin about the new UK pension rules, made by an adviser based in Australia. He pointed out that too many companies are taking advantage of people's inexperience and misunderstanding of the UK pension system.
Within minutes of reading that, I saw “Don’t lose 55% of your UK pension in tax” as part of an advert for QROPS. This is despite the fact that the new proposed rules in the UK have been common knowledge since the Budget in March, and we are now into July.
A few issues came to mind:
When I started dealing with SIPPs in the early 1990s, we had to look at income withdrawal (35% tax on death in those days) versus phased retirement. We used phased retirement, with the 35% tax on death during income withdrawal in mind, to ensure that all the fund was not taxed on death before the age of 75. While in phased retirement, the special income tax charge does not apply prior to the age of 75.
Were we 20 years ahead of the rest? No, I don’t think so, we just applied the rules to fit the client circumstances as did any half decent firm of pension IFAs.
With the new flexible UK rules announced in the Budget, phased retirement within a SIPP has increased relevance for UK expats. But it seems that a lot of offshore advisers that sell QROPS do not know about phased retirement in a SIPP, or choose not to mention this.
Why is it important?
Well, soon you will be able to access as much your UK money purchase pension fund as you want from the age of 55. So, splitting your pension across a range of sub-policies,or segments, means you can cash in the segments you need for income and leave the others to grow tax free.
If the other segments are not yet “crystallised’’ ( ie taking an income from them) , then you are not in drawdown. If you are under 75 and not in drawdown and in phased retirement, there is no 55% tax (or whatever rate will apply next year) when you die.
Of course, the funds that are not crystallised can be paid out free of Inheritance Tax, perhaps to a trust, and the family wealth is protected.
The only caveat to this is if clients want to access their maximum lump sum immediately at retirement. However, that decision can be made many years in the future based on legislation at the time- there is no need to move funds offshore now, in many cases, for something that may or may not be needed until retirement.
Secondly, in my experience, a lot of people access the lump sum when they retire and then invest it for retirement income. If they had not accessed the lump sum, it is likely that they would have paid less tax, received higher income and attained more growth if they had left the funds in the pension. It is all about taking proper cashflow and tax advice at the right time.
Finally, if someone is in phased and is approaching 75 years of age, then perhaps that could be the time to move the funds offshore. But for many expats, considering a pension transfer, that could be 20 to 40 years in the future and who knows what tax rates and pension rules will apply at that time?
Warning
Be very careful of any advert that suggests a move to a QROPS will save 55% of your pension, particularly if that is given as a primary reason for a transfer to a QROPS.
Mr Osborne has just busted that myth, with his new UK pension rules.
New Pension Rules 2015
Since writing this blog, the new rules have come into force. Until April 2016, the fund of an over 75 year old ( if paid out ) could result in a 45% tax charge. This is removed from April 2016, giving UK pensionholders a number of excellent financial planning opportunities- subject of a future blog.
Within minutes of reading that, I saw “Don’t lose 55% of your UK pension in tax” as part of an advert for QROPS. This is despite the fact that the new proposed rules in the UK have been common knowledge since the Budget in March, and we are now into July.
A few issues came to mind:
- The UK government is consulting on the level of this tax and it is widely expected to fall
- I keep seeing references to this as being Inheritance Tax. It is a special income tax (non-recoverable) that is payable by the scheme administrators and, if it was Inheritance Tax, wouldn’t the normal exemptions apply meaning that many would not pay it at all?
- Prior to the age of 75, this tax only applies after the funds are accessed for income-or is it?
When I started dealing with SIPPs in the early 1990s, we had to look at income withdrawal (35% tax on death in those days) versus phased retirement. We used phased retirement, with the 35% tax on death during income withdrawal in mind, to ensure that all the fund was not taxed on death before the age of 75. While in phased retirement, the special income tax charge does not apply prior to the age of 75.
Were we 20 years ahead of the rest? No, I don’t think so, we just applied the rules to fit the client circumstances as did any half decent firm of pension IFAs.
With the new flexible UK rules announced in the Budget, phased retirement within a SIPP has increased relevance for UK expats. But it seems that a lot of offshore advisers that sell QROPS do not know about phased retirement in a SIPP, or choose not to mention this.
Why is it important?
Well, soon you will be able to access as much your UK money purchase pension fund as you want from the age of 55. So, splitting your pension across a range of sub-policies,or segments, means you can cash in the segments you need for income and leave the others to grow tax free.
If the other segments are not yet “crystallised’’ ( ie taking an income from them) , then you are not in drawdown. If you are under 75 and not in drawdown and in phased retirement, there is no 55% tax (or whatever rate will apply next year) when you die.
Of course, the funds that are not crystallised can be paid out free of Inheritance Tax, perhaps to a trust, and the family wealth is protected.
The only caveat to this is if clients want to access their maximum lump sum immediately at retirement. However, that decision can be made many years in the future based on legislation at the time- there is no need to move funds offshore now, in many cases, for something that may or may not be needed until retirement.
Secondly, in my experience, a lot of people access the lump sum when they retire and then invest it for retirement income. If they had not accessed the lump sum, it is likely that they would have paid less tax, received higher income and attained more growth if they had left the funds in the pension. It is all about taking proper cashflow and tax advice at the right time.
Finally, if someone is in phased and is approaching 75 years of age, then perhaps that could be the time to move the funds offshore. But for many expats, considering a pension transfer, that could be 20 to 40 years in the future and who knows what tax rates and pension rules will apply at that time?
Warning
Be very careful of any advert that suggests a move to a QROPS will save 55% of your pension, particularly if that is given as a primary reason for a transfer to a QROPS.
Mr Osborne has just busted that myth, with his new UK pension rules.
New Pension Rules 2015
Since writing this blog, the new rules have come into force. Until April 2016, the fund of an over 75 year old ( if paid out ) could result in a 45% tax charge. This is removed from April 2016, giving UK pensionholders a number of excellent financial planning opportunities- subject of a future blog.