New UK Pension Rules for 2015 and its Effect on QROPS Transfers
The new UK pension rules which came into force on April 6th, 2014 have shaken up the pension industry. By April 6th, 2015, you may be able to draw your entire pension in the UK. Whilst savers might be rejoicing, this is not all good news and without proper planning, you will be paying considerably higher taxes and running out of your pension money more quickly.
Below is a quick summary on why transfers out of the UK tax net into an overseas pension scheme such as a QROPS is still an attractive proposition for most British expats, then later we will drill down into the detailed points.
For a detailed free transfer value analysis, please enter your email next to the video above.
Summary – Why QROPS Are Still Attractive for Expats in 2015
- A QROPS gets you out of the UK tax net, avoiding 55% tax upon death and UK income taxes of up to 45% which you could pay if left in the UK under flexible drawdown.
- 100% of your pension pot on death can be paid to whoever you like as a cash lump sum or an income without deduction of tax (which is still 55% for UK schemes).
- Ability to transfer to the currency of your choice. This will give your pension income more stability for any purchases you want to make.
- The maximum tax-free cash available from a QROPS at retirement is generally higher: Over 30% vs just 25% from a UK scheme (and UK schemes are also subject to 25% tax above the lifetime allowance (£1.25m for 2015). There is no upper limit on QROPS.
- The ability to transfer from UK Government unfunded defined benefit schemes (e.g. NHS, Armed Forces) will cease within the next 8 months.
- UK private sector defined benefit transfers (i.e. final salary schemes, company pension schemes), and certain (funded) public sector transfers can be transferred to a QROPS beyond April 2015 as long as it is through a UK FCA-regulated adviser. Transferring now means less hoops to jump through.
- Transferring funds from UK schemes protects clients against future reductions in the max. lifetime allowance (which has already fallen from 1.8m GBP to 1.2m GBP).
- Transferring now guarantees that the overseas transfer can happen without a tax penalty, an option which could still disappear.
- Once transferred, clients are no longer subject to the ever changing UK pensions landscape. You will be locked in under current qrops/tax rules.
- The LTA will reduce further both in actual and real terms, meaning a greater chance of clients being punitively taxed long-term as funds grow and the LTA reduces.
- Pension liberation at age 54.9 is officially discouraged, for good reason. Pension liberation at age 55 is not to be recommended either. Instead proper planning through a transfer to a QROPS is encouraged
For a detailed free transfer value analysis, please enter your email next to the video above.
Transfer NHS Pension Overseas to Avoid UK Taxes
We can help doctors and people who have worked at the NHS and want to transfer their pensions overseas to a QROPS. Click this link to contact the British Medical Association and ask you for the latest transfer value.
Any British expats who have worked in the NHS or any foreign doctors or nurses who have worked in the UK are eligible to transfer their UK pensions offshore to avoid the 55% tax upon death and UK income taxes. You can also transfer your pension into the currency you want and invest in the funds you want.
You can read more on NHS pension transfers here.
10 questions concerning the new UK pension tax rules 2015
Here is a Q&A between Boal & Co (QROPS Trustee Providers) and HMRC about the future of the UK and QROPS pension landscape.
1.1 Should a statutory override be put in place to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility?
A new override will be introduced to ensure that pension schemes are able to offer individuals flexible access to their savings.
Individuals will also be able to transfer between defined contribution (DC) schemes, if their scheme does not offer flexible access.
1.2 How could the government design the new system such that it enables innovation in the retirement income market?
The tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers.
The government will make a number of changes to the tax rules to allow providers greater freedom to create new and innovative products which more closely meet consumers’ needs. The government intends to change the current tax rules in order to:
allow lifetime annuities to decrease, which will provide significantly more flexibility around the design of the product. This will allow providers to offer products which meet individuals’ needs more closely, for example by allowing annuity payments to reduce once an individual becomes eligible for the State Pension.
allow lump sums to be taken from lifetime annuities, on the condition that this is specified in the contract at the point of purchase.
1.3 Do you agree that the age at which private pension wealth can be accessed should rise alongside the State Pension age?
The government will increase the minimum age at which people can access their private pension under the new tax rules from 55 to 57 in 2028.
1.4 Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief?
The change will apply to all pension schemes aside from those in the public sector that will not link their normal pension age to State Pension age from 2015, namely the Firefighters, Police and Armed Forces.
1.5 Should the minimum pension age be increased further, for example so that it is five years below State Pension age?
The government confirms that the minimum pension age will remain 10 years below (an increasing) State Pension age.
1.6 Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should pension providers be required to outsource delivery of independent guidance to a trusted third party?
Guidance on pensions choices will be provided by independent organisations rather than pensions schemes or providers, in order to ensure complete impartiality. Delivery partners will include the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
The government welcomes expressions of interest from a range of trusted consumer-facing organisations, including Citizens Advice and Age UK, and will discuss further with these and other independent organisations how they can be involved.
1.7 Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust-based pension schemes?
There should be no difference between the requirements to offer guidance for contract-based and trust-based schemes.
1.8 What more can be done to ensure that guidance is available at key decision points during retirement?
The government has decided that the guidance guarantee will be provided by organisations which are independent and have no actual (or potential) conflict of interest.
The government is keen to build on existing capability in Money Advice Service (MAS) and The Pensions Advisory Service (TPAS) in providing guidance. The government is therefore pleased that both TPAS and MAS have committed to playing a key role in implementing the service, and are already bringing their expertise and insight to the implementation programme.
The government has decided that, until the service has reached maturity, overall responsibility for service design and implementation will remain within the Treasury, which will work with a range of organisations (including TPAS and MAS) to deliver guidance to individuals.
The government will bring forward legislation to establish a new, separate FCA standards regime, and to give the FCA, as the expert conduct regulator, the appropriate duties and powers to set standards and monitor compliance.
1.9 Should the government continue to allow private sector defined benefit (DB) to defined contribution transfers (DC) and if so, in which circumstances?
It is right to preserve the existing freedom to transfer out of a defined benefit scheme under the new arrangement. The Government will therefore continue to allow transfers from private sector defined benefit to defined contribution schemes, excluding pensions already in payment, subject to additional and important safeguards.
The Government intends to make it a statutory requirement on the transferring scheme for all individuals who are considering transferring out of defined benefit schemes to take advice, from a professional financial adviser who is independent from the defined benefit scheme and authorised by the FCA, before transferring.
As a result, defined benefit schemes will be required to check that a member has taken advice from a professional financial adviser who is independent from the defined
benefit scheme and authorised by the FCA before allowing a transfer out of the scheme. In most cases the individual pension member will need to pay for the financial advice. This requirement for professional financial advice would not apply to small pot holders with pension savings below £30,000 as the trivial commutation rules would still apply.
The Government continues to believe that transfers from unfunded public service defined benefit schemes should be banned.
However transfers from funded public service defined benefit to defined contribution schemes will be permitted, and safeguards similar to those in the private sector will be introduced where appropriate.
1.10 How should the government assess the risks associated with allowing private sector defined benefit schemes to transfer to defined contribution under the proposed tax system?
A number of stakeholders raised the issue during the consultation of allowing full or partial withdrawals direct from a defined benefit scheme, rather than an individual first needing to transfer to a defined contribution scheme, the argument being that requiring members first to transfer to defined contribution schemes creates additional unnecessary burdens and that allowing full or partial withdrawals from defined benefit schemes would better enable the pensions industry to provide the pension products that their members want. The Government intends to consult further on this issue.
UK Pensions and the Effect on Taxation
2.1 In the consultation document, the government confirmed that it would review the tax charge on pension funds held in a drawdown product at death or uncrystallised after age 75, as the current rate of 55% may be too high when the new freedoms come into force in April 2015.
Discussions with a wide range of stakeholders on this issue have confirmed the view that the 55% charge is too high, and needs to be changed. However, this is a complex area and any changes have the potential for unforeseen and unintended consequences. This is an important issue which could have implications for many more people under the new system. The government will therefore continue to consider the options for altering the rate and will confirm its intention at Autumn Statement 2014.
2.2 Under the new system:
To avoid “re-cycling” of tax-relieved contributions as tax-free lump sums, those members currently in flexible drawdown who have an annual [contribution] allowance of £0 will from April 2015 be subject to a new annual [contribution] allowance limit of £10,000 those who choose to draw down more than their tax-free lump sum from a defined contribution
pension will still be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 per year.
this annual allowance will only apply if an individual accesses a defined contribution pension worth more than £10,000. Individuals can make withdrawals from three small personal pots and unlimited small occupational pots worth less than £10,000, without being subject to a £10,000 annual allowance on subsequent contributions.
the current capped drawdown system will be grandfathered for those in capped drawdown on 5 April 2015. This means that those in capped drawdown at this point will not have a £10,000 annual allowance. However, at the point that they withdraw more than the capped amount, they will have a £10,000 annual allowance.
the age limit for trivial commutation (for pension pots in total less than £30k) will reduce from 60 to 55 (and thence to 57 etc in 2028).
2.3 The government recognises that the changes to the pensions tax rules outlined in this chapter will have implications for the rules relating to Qualifying Recognised Overseas Pension Schemes (QROPS).
The government will consider these implications further to ensure that the rules relating to QROPS are appropriate when the new system comes into force.
Reading Between the Lines – the Effect on Pensions and QROPS Transfers
3.1 Transfers from (unfunded) public sector DB pensions are still definitely going to end next year. The window is closing. Clients who are considering such a transfer need to know that time is running out, and consider their options NOW.
As ever, we very strongly recommend that anyone considering a DB transfer only does so in conjunction with a meaningful Transfer Value Analysis (TVAS) – by definition, one not based upon annuity purchase (which Boal & Co, as actuaries, are very well placed to provide).
3.2 Private sector DB transfers can continue to be transferred beyond April 2015. So too can some public sector DB schemes that are funded (such as the Local Government Pension Scheme). But such transfers can only happen after Apr 2015 with the insertion of an FCA-regulated adviser.
The Qrops business model
The DB model will change significantly next year. We will do all that we can in 2015 to ease the burden for clients, but in the meantime the key point to note is that DB final salary pension transfers on the current business model can continue for only another 8 months.
“Clients with pending private sector DB transfers need to act NOW!”
3.3 The government response does not address the detailed taxation position of non-residents who encash a UK pension. We expect that this will be clarified soon, in one of the follow-up consultations. Will a special tax charge be introduced? For now, it is impossible to say.
3.4 Qrops will seemingly join the flexible drawdown party (see 2.3 above), but only once the government have made up their mind on the final menu.
3.5 The minimum retirement age will increase to 57 in 2028, and will increase in line with State Pension Age thereafter (=SPA-10).
3.6 The current 55% death tax applicable to UK schemes (and to some Qrops members) is considered too high, but it is too complicated to change it for now. Await the Autumn Statement, and make sure you don’t die before 2015!
3.7 The range of pension annuity options available in the UK will expand considerably. Whether the new products will be more appealing (in terms of returns) than the present ones remains to be seen.
3.8 Members with UK pensions will be guided (generically) in terms of choice by organisations such as TPAS and MAS.
3.9 A statutory over-ride will be introduced to UK DC schemes, so as to enable flexible drawdown to occur, even if scheme/contract rules do not allow it.
3.10 Boal & Co was one of only two Qrops providers to contribute to the consultation.
Now what for QROPS?
4.1 The government will take forward two separate pieces of legislation during the autumn – the Pension Schemes Bill and the Pensions Tax Bill.
4.2 The Pension Schemes Bill
will deliver the regulatory framework for defined ambition pension schemes,
and will include provisions to enact the guidance guarantee and the restrictions on transfers from public service defined benefit schemes. It will also include changes to pensions legislation necessary to ensure that individuals can access their pension saving.
The Bill was introduced on 26 June 2014 primarily to take forward the government’s plans to introduce a regulatory framework for ‘Defined Ambition’ and collective pension schemes. The Bill allows the government to remove the option to transfer from a public service defined benefit scheme to a defined contribution scheme. The government will bring forward amendments to this Bill to introduce the guidance guarantee.
4.3 The Pensions Tax Bill
will take forward the tax changes needed from April 2015. A technical consultation
on the draft tax legislation will be published shortly to ensure that the legislation enacts the policy as intended. The draft legislation will be issued for technical consultation in August 2014 and be introduced into Parliament in autumn 2014.
4.4 In addition to bringing forward legislation, the Treasury-based team leading the implementation of the guidance guarantee will continue to work into the autumn, with a range of stakeholders and partners. The government plans to publish a progress update in the autumn. The FCA has also issued a first consultation paper on standards for guidance, and related rules, over the summer and intends to publish a Policy
Statement later in the autumn.
What is the future of QROPS?
5.1 The continued ability to write Qrops beyond Apr 2015 is still not 100% certain, so clients need to understand that with effect from 6 April 2015 QROPS transfers could cease to be an option.
There is a definite “buy now” Qrops opportunity for the next 8 months. Beyond that the picture is uncertain.
5.2 At Boal & Co we recognise the importance of allowing members to domicile their pension benefits in the most tax-efficient jurisdiction. Boal & Co has a track record of evolving our proposition (though Trinity/50C looks very tame indeed compared with the UK changes!) and there is no doubt that the QROPS market can evolve further.
Many QROPS providers are continuing to waive their transfer-out charge for new business written from 27 March 2014, where transfer is to either a UK registered pension after April 2015 or to any alternative QROPS scheme. Advisers can take comfort should the landscape change unexpectedly, meaning that they can reposition new clients with no penalty.
There are few downsides with transferring to a QROPS if you have a pension of 100k GBP or above, especially as some firms are even allowing transfers back into the UK if it proves more beneficial to do so under the new pension rules (e.g. Boal & Co and Momentum Trustees).
- Many thanks to Boal & Co. for the Q&A with HMRC
Please email us at qrops.tv if you have any questions