The Autumn Statement and Rule Changes to Pensions for 2015
The Autumn statement has arrived and not much different was in than expected. The equal treatment on death of annuities and defined contribution pensions. The closing of transfers from public sector pension schemes to offshore tax beneficial schemes such as QROPS and the “abolition of tax on death of pensions”.
I have put this in quotes, because the tax on death is only avoided if you die before 75, so only if you are good enough to top yourself before your 75th birthday do the family benefit. Most men die at 83 years old or later… and its higher for women.
There will now be a rush for those with public sector pensions to transfer to avoid the tax on death and be treated equally alongside DC pensions and annuities which now have much higher pension freedoms.
The New Pension Freedoms
- Removal of the 55% pension death tax charge: In the event of death before 75, you will be able to pass your defined contribution pensions fund to any nominated beneficiary. The beneficiary will pay no tax.
- For death after age 75, the beneficiary will pay their marginal rate of income tax, or 45% if the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at the recipient’s marginal rate.
- Individuals who die before 75 with a joint life or guaranteed term annuity, the surviving partner/beneficiary will receive any future payments tax free.
Confirmation that only funded defined benefit schemes can be transferred to defined contribution schemes in order to access the new flexibilities.
- As we previously commented, with the average age in the UK in excess of 80, the net effect of these proposals is to reduce the effective rate of tax to the beneficiaries’ marginal rate.
Option 1 – Keep Pension in the UK
- Tax on death still 45% if taken as a lump sum after age 75. Life expectancy for men after they reach age 65 is 83 years old for men & 85 and a half for women. So, unless you plan to top yourself, your partner and children will be much better off under a QROPS on death unless you spend the lot.
- You still pay tax on income in the UK. This tax ranges from 20% to 45% depending on which bracket you are in. Don’t forget rental income and state pension income will also count, so you can quite easily fall into a higher bracket than you thought.
- Personal allowance remains in place for 2014 – 2016 and rises to 10,600 GBP before paying income tax in April 2015
- There are also a lot of rules in the UK surrounding where you can place your investments.
- The basic rate limit will rise to £31,785
- The higher rate income tax threshold will rise to £42,385 next year
Option 2 – Move Pension Abroad to a QROPS
- No tax on death
- Your entire pension pot is passed on to whomever you choose on death with no tax taken off at source
- Higher tax-free lump sum allowed. On a 200k pension pot, you get 60k tax free rather than 50k GBP.
- Income tax can be reduced to zero or at least a negligible amount. For example, income tax is only 2.5 per cent in Gibraltar. You can pay 2.5% tax in Gibraltar or 20% – 45% tax in the UK. Your choice.
- If you leave your pension in the UK, it is open to further tax increases, for example, the personal allowance may be wiped out in 2017. This is still under discussion, but won’t take effect in the next two years. However, the government have left it on the table and say that there is a ‘rationale’ to tax expats.
Other Notable Effects on Inheritance Tax Planning and Income
People will be able to pass on their tax-free ISA allowances to spouses when they die (no mention of children though). Unfortunately, ISAs still attract IHT. You can transfer to QROPS to take away the death tax charge, although it may then attract a small income tax charge.
New Stamp Duty Rules 2015
Property Value Stamp Duty
0 – £125,000 0%
£125,000 – £250,000 2%
£250,000 and £925,000 5%
£925,000 – £1.5 million 10%
£1.5 million+ 12%
So, there would be a saving for 98% of homes. Only homes 1.5m+ will face a larger stamp duty.
A £2.1m purchase would carry £18,750 more stamp duty compared with the old system
You can read more here on the Stamp Duty Reform.
National Savings & Investments Income Bonds for the over-65s go on sale in January, interest rates will be revealed next week
Conclusion of the New Flexible Pension Changes on Expats
Confirmation that death benefits paid from annuities will enjoy the same tax treatment as income drawdown from April 2015, but DB pensions will still have tax on death, so those in final salary schemes should look into transferring out. Also, their will be a rush out and you need to consider transferring now.
Expats can now cash-in their UK pensions, but they would pay their highest marginal rate of tax which could be up to 45% on their pension pot. That could take a decade or more to make up if reinvested.
A QROPS avoids both UK income taxes and also the death tax. It also allows more investment freedom.
Detailed advice based around residency, timing of pension commencement lump sum, age at retirement, retirement intentions, country of residence at retirement and death provisions all need to be considered upon retirement.
Alan Higham, retirement director for Fidelity Worldwide Investment, agreed that there were no real surprises this time round.
You can read the full Autumn Statement for 214 here.