When I started in this business in England way back in 1977, before many of you were probably born, life and pensions were fairly straightforward affairs. We were admittedly at the beginning of the end of the time when people tended to work for pretty much the same employer for decades, and so building up your pension entitlement tended to happen in spite of any effort (or lack of effort) on the part of the employee. I was tasked with administering the radical end of the workforce which in those days, were the self-employed, having done a short stint on Executive Pension Plan administration.
Now, in 2014, we are looking at a situation where the UK government of the here and now is potentially giving us what appears to be complete access to our tax advantaged retirement funds, originally sacrosanct and intended only to keep us in the manner to which we intend to be accustomed for the remainder of our time on Earth. Hold on a minute, it seems like only yesterday that this same administration was rapping the knuckles of QROPS providers in New Zealand for offering much the same choice. Is this the same lot who closed down various previously recognized plans in Singapore and Hong Kong?
Who said election looming?
Whatever your preferred reason for the turnaround in policy, all is not what it may seem when you go behind the tabloid headlines because, yes, you may be able, under certain circumstances, to access your entire pension fund in one lump sum, BUT you will pay tax at your highest marginal rate on 75% of that money. Think again if you think as a non-resident you don’t have a “marginal rate of income tax”
Take someone with a pension fund of say three hundred thousand quid. In the right circumstances, 75,000 or so comes to you free of UK tax, but watch it, if you live in some other country, that government might want a piece of that action. Then, under the old system you would be forced to convert the rest into an income for life, which in a low interest rate environment like we have today might be rather a paltry sum compared to what your Daddy might have got. Now, they are telling us we can take that in cash also but wait, 100,000 in tax please, leaving you with a grand total of less than 2/3rds of your original pot.
To add insult to injury, unless you spend that money and you die while it’s still in your name you could be looking at Inheritance Tax at 40%!!!!
What’s the alternative? If you have a UK pension fund gathering dust in the UK, it might be worth looking at a Qualifying Recognised Overseas Pension Scheme (QROPS).
Existing since 2006, these have been an unmitigated success, much to the dismay of HMRC. Literally hordes of people have taken advantage of these schemes since they were introduced and some generally well-informed and better educated than me are saying there are potential negative changes coming to a QROPS near you in the not too distant future.
Should your pension remain in the UK, payments from it would generally be taxed as earned income. From 6 April 2006 a single set of rules came into effect. Under this system, the tax treatment for all types of approved schemes, including occupational schemes, small self administered schemes, personal pensions, self-invested personal pension plans and retirement annuity contracts has been amalgamated into the rules for registered pension schemes.
Generally, non UK residents are subject to UK income tax on UK source income. Therefore on payment of a UK pension, income tax is charged at the individual’s marginal UK tax rate (current top rate 45%), but this could be different if you are tax resident in a country that has a Double Tax Agreement (DTA) with the UK.
In a nutshell, as it stands right now you can transfer your UK pension fund out of the UK tax net, (provided you meet certain conditions), and take full control over the investment of those monies, and choose the underlying currency, and access more cash at retirement than you would in a UK scheme, and continue to grow your pension fund outside the UK tax net, and mitigate or even avoid ‘death tax’, avoid potential liquidity problems should your former employer get into difficulties and others.
Here’s my question; why would the UK government allow you to transfer your entire pension fund out of the UK into a secure environment where you as an individual have greater control and access to your own money when they could take either income tax, inheritance tax or both on your lump sum or income by forcing you to leave it in the UK scheme? Do you think the UK does not need the money?
I see a window of opportunity here. It’s not possible, most likely, for them to stop you from moving it, but it’s possible they might impose a transfer tax on those movements.
Right now, transfer of UK pension funds to a QROPS is not taxable. After the likely implementation of the new measures announced last budget day, is there a chance that situation will change?
I ask you; Do you feel lucky?