Changes to UK pensions: how will they affect you?
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.
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.
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.
There will be more flexibility for annuities purchased after 6 April 2015. For example, it will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before state pension benefits begin. In addition, there will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and providing that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the double-tax treaty between the UK and France.
However, there are a number of French tax implications to be considered here, and these are as follows:
- You will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate.
- If France is responsible for the cost of your French health cover, you will then also be liable for social charges of 7.1% on the amounts received.
- The former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax.
Therefore, if you are French-resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action.
Such financial advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) could be in your best interest.
UK Pension Reforms
With just a few days to go until the ‘over 55s’ can flexibly access their UK defined contribution pension pots, the explosion of information already available via the internet looks to me as if this is in danger of turning into ‘information overload’.
Now of course, this is just my opinion – and please don’t misunderstand my feelings about this – because I am in total favour of people having free access to accurate information, providing that it is understandable and definitely not misleading. However, my concern comes from the volume of information that is being made available, almost in an attempt to condense the multiple choices that people will have into a sort of ‘Dummy’s Guide to Flexibility & Choice in Pensions’.
In February, “Pension Wise” was launched and this is the “free and impartial government service that helps you understand your new pension options”, that the government promised us. My first impression from the opening page of the website was favourable – a good clear design with a simple list of six steps to help us understand how to turn our pension pots into income for our retirement.
The first step seemed simple enough – “check the value of your pension pot” – nothing contentious there. It told me that I could combine multiple pension pots into one, by transferring my pension and so I clicked on that link. Whoops, now I’m out of the Pension Wise website and I’m in the Gov.UK website, which provides me with links to such things as “deferred annuity contract”, “unauthorised payment” and “fixed or enhanced protection”. Already confused? OK fine, so let me get back to Pension Wise …..
Step number 2 is all about understanding what we can do with our pension pots. Good, I thought, until I clicked through to the page and this was the first taste of ‘information overload.
There were lots of links to things that are pretty important and these took me through to “Gov.UK”,” FSCS” and the “FCA” and actually out of the Pension Wise website. There was also a link to the Money Advisory Service, so that I could compare annuities, but it didn’t like my French postcode, so that was a dead end. Being curious though, I entered my old UK postcode and proceeded through the 6-page questionnaire, including having to answer detailed lifestyle and health questions, only to find at the end that it could not retrieve my quotes!
In fact, every one of the six step pages had links that took me into other websites and for me, that’s where Pension Wise failed. In what is clearly a brave effort to try to provide comprehensive guidance (which amazingly, even includes how to calculate the UK income tax on the retirement income), I think this has the potential for disaster. There is simply too much and by the time you get through one lot of information, you have forgotten how you got there and on which part of the website you found other information that might be useful.
According to its website, “Pension Wise won’t recommend any products or tell you what to do with your money”. Hmm, I wonder what the annuity quotes would have looked like, but there again, these would have been through the Money Advisory Service and so I guess that’s how Pension Wise gets around that one!
They also say …. “We explain how to avoid pension scams and the importance of taking your time to make sure your money lasts as long as you do”. Good, I’m all for these things, but do they really mean what they say and don’t they see any risk that people might just outlive their flexibly accessed pension pot?
Even more alarming, is some of the information being produced by other companies. For example, one company writes in its literature on defined contribution pensions after April 2015: “….. You will be able to take out as much as what’s there as you want, when you want. So it’s going to feel a bit like a bank account ….” Another company writes: “…… There will no longer be an annual limit on how much you can draw and you will be able to use your pension fund like a bank account”…….
OK, maybe I’m taking these comments out of context but nevertheless, bank accounts are short-term financial products and pensions are long-term and it’s dangerous to mix the purpose of the two.
Guidance is not a substitute for professional advice and when people are faced with such a range of choices, advice is needed more now than ever.
For anyone living outside of the UK, potentially the risks of making a ‘misinformed’ choice are increased. Even if you could find a UK adviser who would be prepared to provide advice to someone who is not resident in the UK, a UK adviser is highly unlikely to have the knowledge of local tax rules in the jurisdiction where you live. In France, it is not just income tax that we have to think about, there is also wealth tax and inheritance tax, both of which might become an issue if the pension pot is cashed-in and the monies are sitting in your bank account. Therefore, it is essential to obtain advice from an appropriately qualified adviser in the country where you live.
Pensions is one of the major subjects that we are covering in our client seminars this year. We are already taking bookings for Le Tour de Finance 2015 and more information can be found on our website at www.spectrum-ifa.com/seminars/. This is a perfect opportunity to come along and meet industry experts on a broad range of financial matters that are of interest to expatriates. The local events are taking place at:
- Perpignan – 19th May
- Bize-Minervois – 20th May
- Montagnac – 21st May
Le Tour de Finance is an increasingly popular event and early booking is recommended. So if you would like to attend one of these events, please contact me to reserve your places.
Whether or not you are able to come to one of our events, if you would like to have a confidential discussion about pensions, investments and/or inheritance planning, using tax-efficient solutions, please contact me using the form below.
Are you thinking of moving to France?
I am planning to move permanently to France but am not sure where to go for information on the differences in regulations regarding tax, inheritance and pensions between France and my current country of residence?
Whilst there are a number of forums and websites offering opinion and suggestions regarding the differences in French taxation from where you currently live, it is worth considering the following points before you make any decisions:
What experience does the person/site/forum have in this field?
- Ensuring that the information you want is accurate, relevant to the country you will be living in and free of any personal bias and opinion, is vital in enabling you to make the right choices going forward.
Is the information you will receive regulated in the country you will be living?
- Rules and regulations in the country you are leaving will most likely be different to France. Making sure the recommendations you receive are based on what is best for you as a French resident is very important.
Has the person providing you the information personal experience of your questions?
- It is always a comfort to speak to someone who has ‘walked the walk’ and not just a casual or second hand grasp of your questions. Personal experiences can often assist people getting used to new legislations and bureaucracy.
Whether you want to register for our newsletter, attend one of our road shows, Le Tour de Finance 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.
Financial seminar for expats in Catalonia
The Spectrum IFA Group’s Chris Burke spoke at a recent financial seminar alongside Spanish Lawyer, Nuria Clavera Plana, in Llafranc. The event was attended by 30 people and was followed by a Q&A session and a chance to meet the speakers over coffee.
Chris’s presentation covered:
- Currency forecast, thoughts and ideas to implement for 2015.
- UK Government Pensioner Bonds – 2.8%-4% per annum for anyone holding a UK bank account and debit card.
- UK Pension & QROPS changes – Is your pension being managed effectively and is it in the right place?
- Spanish Life Assurance Bonds/Investment – potentially Tax efficient, historically good returns (Prudential) and potentially succession planning friendly.
Chris ran through the concept of ‘the magic bank account’ for over 65’s in the UK, and many people were surprised to find out that you do not have to live in the UK to benefit from these – you just need a UK bank account and debit card and can achieve between 2.8% to 4% per annum with the savings also government backed. He discussed predictions and thoughts on currency, which highlighted last year’s most successful currency forecaster, stating that the Euro/Dollar will be at parity at 1-1 by the end of 2015. Still just as unnerving for those living in Spain, was the prediction that the Euro would reach 1.42 by the end of 2015 against the pound, particularly if the EU have to keep printing money to solve the crisis.
The new rules on UK pensions and QROPS were also highlighted. QROPS is a UK pension that has been moved overseas to benefit from EU rules (please note your pension should be evaluated by a qualified pension evaluator before you consider doing this) and although the new UK rules give much more flexibility, everyone acknowledged that hefty tax could have to be paid to access these. Qrops still has benefits over and above leaving your pension in the UK depending upon your situation, and from April 2015 should have nearly all of the benefits a UK pension will be entitled to, and potentially more.
Tax efficiency was perhaps the most popular subject Chris presented on, with most people interested in saving money on taxes both on their savings and with succession planning. In fact, passing on their money tax efficiently was the main interest over coffee after the presentations.
Presentation From Nuria Clavera Plana (Lawyer):
- New income tax for Catalonia 2015 and what are the exemptions.
- New Capital gains Tax for 2015 in Catalonia.
- What assets need reporting.
- Pension income from sources outside of Spain Amnesty.
Nuria as ever gave a very interesting presentation on what you now have to pay in taxes throughout Catalonia, the reasons why and how this works. By far the most popular conversation was the changes to Inheritance tax rules now in Catalonia, which in essence are the same now for Spanish Nationals and Foreigners residing here. This incorporates a big reduction in tax compared to before. It was also surprisingly good news for those leaving behind assets up to €1,000,000 with potentially limited tax to pay.
There were many questions surrounding what does and doesn’t need reporting for the Modelo 720 overseas asset declaration, ranging from classic cars to items not reported before. This topic always throws up major questions as always!
This year in Spain it is now a requirement to report any overseas pension income you are receiving up until the 30th June 2015. This generally would not have been taxed in most cases in the respective overseas countries due to the amount in question. However this should be reported in Spain and could therefore be subject to Spanish tax laws. It was discussed that this new law has been brought in mainly to find those Spanish Nationals who have been receiving pensions from working abroad previously and have not been declaring them or paying the relevant tax.
Nuria as ever gave everyone detailed analysis on these changes, so everyone left the event with a better knowledge of their own personal situation.
If you would like more information on this or any other questions you may have regarding Tax advice, please do not hesitate to contact Nuria on email@example.com or Telephone 972305454.
Chris and Nuria would like to thank all the attendees for asking such pertinent questions and joining in, making the event such a success.
Chris will also be presenting at future seminars in the coming months. Please feel free to contact him on firstname.lastname@example.org or telephone him on 936652828 if you would like to know more about these, or wish to discuss any of the above details.[Gallery not found]
Financial Independence: What’s your number?
What does financial independence mean to you? Are you on track for a future free from financial stress? Do you know what your number is?
Knowing the answers to these questions could help determine how soon and how well you could retire, yet many of us don’t…
If you are financially independent you have amassed enough wealth to generate a passive income sufficient for meeting all financial obligations, without the need to work. Your potential for financial independence is dependent on your current net worth, your target net worth and the years remaining before retirement, as well as how much you spend. The more money you spend now and going forward, the more you will need to accumulate to support your lifestyle.
So how do you calculate exactly when you could comfortably retire?
The first step towards financial independence is to calculate how much you’d need to save. A simple formula can tell you not only how much you will need, but also how close you are now to getting where you want to be:
- Study your statements and determine how much you require annually in order to meet all your financial obligations. Could this number be reduced? Are there any unnecessary expenses? Could home and car insurance premiums be reduced? Is downsizing your home an option?
- Determine what return you could get on your investments. As intimidating as the stock market may seem at first glance, it’s possible to assemble a portfolio that pays you 3-5% in dividends annually. This dividend income is cash paid to you monthly, quarterly, or annually and doesn’t erode your investment.
- Calculate what nest-egg you need to build to generate the annual income you require. Annual income required divided by the percentage return you expect to get. Calculations should include cash only, not property or assets.
- This calculation does not account for inflation or taxes.
- This calculation only covers essential expenses. Determine how much spending money you need monthly, then calculate the annual amount and add it into your figure.
- Your life could change in the next few years, which means you’d have to recalculate. If you decide to upgrade your home or have a family, you’ll need a bigger number.
What’s Your Number?
UK Pensions Reform Overview
This year brings about major changes in UK pension rules. Under the reform of ‘Freedom and Choice in Pensions’, people will be provided with more 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 being made in October. Additionally, some provisions were clarified in last month’s UK Autumn Budget Statement. Therefore, subject to there not being any further changes before the eventual enactment of the legislation, we can be reasonably certain of the new rules.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs 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 what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get 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 therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP, if they have left the service of the former employer.
The majority of the changes will be effective from 6th 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 have such a transfer.
Under the new rules, people will be able to take all of their ‘pension pot’ as a one-off lump sum or as several separate 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 tax rate 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 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 defined benefit pension 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 of the number of small pot lump sums that may be paid from occupational schemes. 25% of the pot will be tax-free for a UK resident. 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 as age 55, in all circumstances (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.
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 6th April 2015:
- In the event of the pension member’s death before age 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; or
- If the pension member is over age 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.
There will be more flexibility for annuities purchased after 6th 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 Taxation Treaty between the UK and France. However, there are French tax implications to be considered, 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 also be liable for social charges (CSG & CDRS) 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 (i.e. if your net taxable assets exceed the wealth tax entry level).
Therefore, as a 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 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.
Note, that for those expats who already have transferred pensions to a QROPS or are thinking of doing so? the Pension Taxation Bill makes provision for the proposed UK pension reform to follow through to such schemes.
However, a complication exisits, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pesion funds in all circumstances.
The Pensions Taxation Bill does already make some provision for the proposed UK pension reform to follow through to Qualifying Recognised Overseas Pension Schemes (QROPS). However, a complication exists, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pension funds, in all circumstances.
Therefore, before the new flexible rules could apply to QROPS, the UK Regulations must be amended and it is understood that there is on-going work in this regard. Whether this work will be completed before 5th April 2015 is not known.
However, even if the UK does amend the QROPS Regulations, it will then fall to individual QROPS jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own Regulators may not agree entirely with the UK’s ideas of flexibility! In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation outcome of someone fully cashing-in their pension fund (whether whilst still in a UK pension arrangement or if later allowed, from a QROPS) is likely to be a sufficient practical deterrent for anyone actually wanting to do this. Therefore, for someone who has left the UK, a QROPS should continue to be a viable alternative to retaining UK pension benefits, particularly since the advantages of a QROPS have not changed. However, everyone’s situation is unique and this is why seeking advice from a competent professional is essential.
Saving for Retirement in Spain
How do you save for retirement in Spain and what are the best options for expats?
These days there are quite a few choices on how to receive your pension as a British expat and, if you qualify for a UK state pension, you can claim it no matter where you live. The money can be paid into a UK bank or directly into an overseas account in the local currency. If you move to Spain before retirement and work there for a number of years, it may also be possible to receive a state pension from more than one country.
If you’ve qualified for a state pension from the UK, it will be paid (and taxed) in Spain but uprated every year in the same way as the UK. The personal tax allowance in Spain is €6,069 (£4,923) compared with £10,000 in the UK. The basic rate of tax is also higher, at around 24% compared to 20% in the UK. And in Spain there is no 25% tax free lump sum available when retiring, and any Isa’s you have in the UK will be liable for tax if you become resident in Spain.
A lot to consider…
Saving for Retirement: Tips
Plan Ahead: Pay off debts and take advantage of tax free personal allowances.
Do Your Homework: Before sitting down with an independent financial adviser, make sure you have a clear picture of your current finances and what you need to consider in order to achieve the lifestyle you want over the years ahead.
Consider Your Saving Options: The recent Budget announced radical changes to pension schemes – good news for savers. From April 2015, individuals may withdraw as much or as little from their pension fund in any year with 25 per cent being withdrawn free of tax.
Regularly Review Investment and Retirement Plans: Review your investment and retirement plans every six months to ensure any advice received is up to date and relevant.
Prudential: Flexible Savings for Retirement
The Prudential Flexible Retirement Plan gives access to a range of flexible retirement and investment solutions to suit your changing needs and priorities. Whether you are approaching retirement or some way off, the flexibility provides an easy transition from saving for retirement, through to approaching retirement and then taking an income.
Professional Advice for Expats
The earlier you get your financial planning in order, the better. Make a mistake with your pension, and you could end up paying for it for the rest of your life.
A pensions expert will be able to point you in the right direction. You will need to take Spanish rules into consideration, so taking advice from an adviser conversant with both UK and Spanish pension and tax rules is essential.
UK Pension Transfers – Update for Expats
The rapidly changing landscape of pension schemes in the UK has led to a great deal of confusion, and it’s not just UK pensioners who are affected: the rule changes also impact expats living outside the UK, especially those considering the benefits of a Qualifying Recognised Overseas Pension Scheme.
As an expat, it’s hard to know which route to take. Should you transfer to a QROPS or leave your pension in the UK? What are the benefits and drawbacks? What impact have recent changes had on your options?
Let’s look at the facts…
Reasons to transfer
● Pension Commencement Lump Sum of 30% of the fund. This is tax-free if UK resident but could be taxable if resident outside of the UK.
● No pension death tax, regardless of age, in Gibraltar and Malta
● Greater investment freedom, including a choice of currencies
● Retirement from age 50 (Malta), and 55 in Gibraltar and Isle of Man
● Income paid gross from Malta (with an effective DTT), and only 2.5% withholding tax in Gibraltar
● Removal of assets from the UK may help in establishing a Domicile outside of the UK (influences UK inheritance tax liability)
What will happen if you leave your personal pension in the UK
● On death over the age of 75, a tax of 45% on a lump sum pay-out.
● Income tax to be paid when receiving the pension, with up to 45% tax due, likely deducted at source,
● Registration with HMRC and the assignment of a tax code.
● Proposed removal of personal income pension allowance for non-residents. Although this is still on the agenda, it has been confirmed that there will be no change to non-residents’ entitlement to personal allowance until at least April 2017.
● Any amounts withdrawn will be moved into the client’s estate for IHT purposes, if this is retained and not spent.
● As the client will be able to have access to the funds as a lump sum, these could potentially be included as an asset for care home fees/bankruptcy etc.
● No opportunity to transfer from many Civil Service pension schemes from April 2015 (Only five months remain for public sector workers to review their pension and then make their own informed decision)
What Does All This Mean?
Regardless of the proposed legislation amendments, transferring to a QROPS still provides certain benefits that the UK equivalent would not be able to offer, although it’s fair to say that both still hold a valid place in expatriate financial planning. The answer to which pension is more suitable for you will ultimately depend on your individual circumstances and long term intentions.
Pension workshops in 2015 – Deux-Sèvres
In November 2014, I was invited by Micala Wilkins of the “Ladies in Business in France” Facebook group to present a pension workshop to those within the group who have moved to France, are working here and wanted to know more about planning for their retirements. Choosing a small venue so that I could focus on the individuals present, we covered the following areas:
- What pension am I likely to receive from the UK when I retire?
- How is the French state pension calculated?
- What income will I require when I retire?
- How can I make up any difference between what I would like to receive and what I can expect to receive?
The delegates all found the information very useful and informative, as you can see from these event testimonials:
“It was a really useful meeting, thanks for organising it – Amanda Johnson gave us some interesting information and plenty to think about:)”
“It was a great session and certainly gave lots of food for thought!”
“An informative session on how, as expats, we can find out what our UK pension entitlement is, how we can maximise our full UK pensions and the steps we can take to get as much of a French pension as possible”
Subject to sufficient interest, I will be happy to conduct more workshops covering pensions, or any other areas of financial planning that readers of The Deux–Sèvres Monthly magazine or any others may want. If you email me your name, postcode and area of interest, I will endeavour to arrange local events throughout 2015.
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Looking forward to 2015
The end of the year is always a good time for reflection and this year we have had much to think about for our clients. However, as well as managing current financial risks for our clients, we are also forward looking. So I thought it would be a good time to do a quick review of some of the things that are on the horizon for 2015.
The UK Pensions Reform is big and we now have a reasonable amount of certainty of the changes taking place in April and it is unlikely that there will be any more changes of substance between now and then. The reform brings more flexibility, which is good, but the reality is that for many, the taxation outcome will be a deterrent against fully cashing in pension pots. This is likely to be even more so in France, where it is not just the personal tax and possible social contributions that are an issue, but also whatever you have left of the pot will then be taken into account in valuing your assets for wealth tax, as well as being potentially liable for French inheritance taxes.
The EU Succession Rules will come into effect in August. While the EU thinking behind this is good, i.e. to come up with a common EU-wide system to deal with cross-border succession, the practical effects will still have issues. The biggest issue for French residents is, of course, French inheritance taxes. Therefore, it may not necessarily be the case that the already tried and tested French ways of protecting the survivor and keeping the potential inheritance taxes low for your beneficiaries should be given up in favour of selecting the inheritance rules of your country of nationality. More information on the ‘French way’ can be found in my article at www.spectrum-ifa.com/inheritance-planning-in-france/ and on the EU Succession Regulations at www.spectrum-ifa.com/eu-succession-regulations-the-perfect-solution/
There is the UK General Election in May and who knows whether or not that will actually be followed at some point by a referendum on the UK’s membership of the EU. Nor do we know what the outcome of such a referendum would be and so there is really no point in speculating, at this stage.
For UK non-residents, we are expecting the introduction of UK capital gains tax on gains arising from UK property sales from April, subject to there not being any changes in the next budget. We had also expected that non-residents would lose their UK personal allowance entitlement for income arising in the UK, but we now know that this will not happen next year. The Autumn Statement confirmed that it is a complicated issue and if there are to be any changes in the future, these will not take place before 2017. Of course, there could be a change in government and so it might be back on the agenda sooner!
We will also have the usual round of French tax changes, although this year the expected changes are much less extensive than in previous years. The French budget is still winding its way through the parliamentary process and I will provide an update on this next month.
Turning to investment markets, my personal opinion is that the main factor that will have an impact in 2015 is central bank monetary policy. Whether this results in tighter or looser policy from one country to another, remains to be seen. What is clear is that the prospect of deflation in the Eurozone remains a real threat and not only needs to be stopped, but also needs to be turned around with the aim of eventually reaching the target of being at or just below 2%. Other central banks around the world have a similar target and in areas where recovery is clearly underway, the rate of price inflation and wage inflation also needs to increase before we are likely to see the start or interest rate movements in the right direction.
Last but not least, with effect from 1st January 2015, under the terms of the EU Directive on administrative cooperation in the field of direct taxation, there will be automatic exchange of information between the tax authorities of Member States for five categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.
If you are affected by any of the above and would like to have a confidential discussion about your situation or any other aspect of financial planning, please contact me using the details or form below.