The New UK Pension Regime
By Mary Taylor, Partner, Blevins Franks
The new UK “pension freedom” came into effect on 6th April, providing new opportunities for retirees, depending on the type of pension. This is a significant change, and all very new, and many expatriates may not realise how they are affected.
First of all, the new freedom is not for all pensions – it does not apply to defined benefit (final salary) schemes, public sector pensions, state pensions or annuities. Most options only apply to defined contribution schemes, the industry name for money purchase schemes such as personal or stakeholder pensions, self-invested personal pensions (SIPPS), executive pension plans etc. The government is currently looking at ways to allow greater flexibility in the way annuities are offered and might include the ability to ‘sell’ one for a cash sum.
You can transfer out of a defined benefit scheme, to a defined contribution scheme or QROPS, but may lose valuable benefits so need to consider it carefully. You can only transfer if you have taken advice from a pension transfer specialist regulated by the UK Financial Conduct Authority. You cannot transfer out of public sector or unfunded schemes.
Secondly, even if you have a defined contribution scheme, you do not have to do anything. You can leave your pension as it is, and continue to receive regular income through income drawdown. Indeed, not all such schemes will offer the new flexibility. There is no regulatory force to make them. As such you would have to transfer to a plan that can offer the new flexibility. In turn that could involve a loss of guarantees or other valuable options. Not all providers accept non UK residents, so the choices are limited. You could always make changes in future. Even if you do want to act now, explore all your options, and the tax and long-term consequences, before taking a decision.
So, what does ‘pension freedom’ mean? You can do almost whatever you like with your funds. Besides taking income drawdown, you could take the whole lot as cash in one go (with no restrictions on how you use the money); you could make withdrawals as and when you want, with the balance remaining invested, or take a lump sum now and then start income at a later date. You could also buy an annuity.
If you do choose to take all or much of your fund as cash, first ensure you have a reliable plan for your long-term financial security.
It is very important to think about the tax implications, especially for larger funds. UK taxpayers receive 25% tax free, but other income/withdrawals are taxed at their marginal rate of income tax.
French residents will pay French tax according to the local rules. State retirement pensions, pensions derived from professional activities and private pensions are taxed at the income scale rates of tax up to 45%. Most government service pensions remain taxable in the UK.
Lump sums from UK pensions are taxed at a fixed 7.5%, provided there is no possibility of taking another lump sum in future. So if you take your entire UK pension at once as a lump sum, it will be taxable at 7.5%; otherwise it will be taxed as income.
Pension income is additionally subject to 7.4% social charges, unless you have EU Form S1 or do not yet have access to the French health system.
Many QROPS cannot yet provide full flexibility on withdrawals. The rule where 70% of the transfer value made to a QROPS must provide an income for life currently remains in place for non-EU QROPS.
The 55% death tax has been abolished, but if you die over age 75 your beneficiaries will still pay tax, at their marginal rate on income or currently at 45% on lump sums. This also applies to annuities, but not final salary schemes.
This is just a brief, generalised summary. It is important to seek personalised, expert advice. Getting it wrong could be very costly.
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.
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