Changes to UK pensions 2014 – is QROPS still beneficial for expats?
Following changes to UK pension legislation in March 2014, financial expert Steven Grover discusses whether QROPS is still a beneficial option for expats living abroad.
As part of the March 2014 budget, substantial changes to UK pension legislation have been proposed by the UK government. Our financial expert Steven Grover, a Partner with the Spectrum IFA Group, will guide you through these proposals and what consequences they could have for expats who are considering transferring their UK pensions abroad through a QROPS scheme.
First of all what is a QROPS?
QROPS (Qualifying Recognised Overseas Pension Scheme) was brought about following changes to UK pension legislation on April 5, 2006. This scheme has been specifically designed to enable non-UK resident individuals, who have accrued pension benefits in the UK, to transfer these out once they have left the UK. Provided that the UK Registered Pension Scheme and the QROPS provider both have the appropriate transfer authority, individuals who leave the UK and establish a QROPS are able to request a transfer of their UK benefits as long as they can provide evidence they are no longer a UK resident.
Due to the fact that this scheme is an international contract, future benefit payments can potentially be received without deduction of UK tax, however individuals will be responsible for declaring the income in their own country of residence. So those who have moved abroad to retire or are thinking about moving abroad in the future, and have private or work pension benefits that would have normally been left behind in the UK, can benefit from a QROPS Transfer.
You can read more about the benefits in QROPS – is it pension option for expats living abroad?
So what are the changes that have been proposed, and which of these changes have already been adopted? The majority of the proposed changes have been effective as of 27 March 2014, as listed below.
Changes to UK pension legislation 2014
1. New higher income drawdown limits
Drawdown investors have a yearly limit to the income they can draw, which is from zero up to the maximum. The maximum amount has increased by 25 precent (from 120 percent to 150 percent of a broadly equivalent annuity). So for instance, an investor aged 65 with a GBP 100,000 pension who started drawdown before these changes could draw a maximum income of GBP 7,080 a year. However, if they started after 27 March 2014 this will rise to GBP 8,850.
2. Flexible drawdown made more accessible
Flexible drawdown allows investors to make uncapped, unlimited withdrawals from their pensions. There are, however, strict qualifying criteria. The main condition is that you must already have a secure pension income of at least GBP 12,000 (previously GBP 20,000). However this minimum must be 'relevant income' so only the following will count:
- State Pension.
- Scheme Pension (so a final salary pension which is fixed).
- Lifetime annuities.
- Overseas Pensions (but only overseas state pension or final salary).
- Pension income provided by the Financial Assistance scheme.
The following income would not be included because they can change, capital can be spent, investments sold, or drawdown income can finish:
- Rental income.
- Drawdown pension income.
- QROPS income.
- Part time salary.
3. More flexibility for investors with pension small pots
Now investors aged 60 or over with total pension savings under GBP 30,000 (formally GBP 18,000) will be allowed to draw them as a lump sum. The first 25 percent will be tax free (in the UK but this may not be the case for tax residents abroad, who will be subject to local tax regulations), and the remaining amount will then be taxed as income. This can only be done once. Investors with individual personal pension pots smaller than GBP 10,000 (formally GBP 2,000, twice) will be allowed to draw them as a lump sum from age 60, which will be taxed as above but can only be done three time.
Proposed changes to UK pension legislation
The following changes, however, have not come into force and are still under consideration.
1. Pension Investors will be able to take the whole of their pension as a lump sum
This is potentially effective from April 2015. Currently most investors aged 55 or over can take up to 25 percent of their pension as tax-free cash (in the UK but this may not be the case for tax residents abroad), and a taxable income from the rest. There are, however, rules that determine the maximum income most people can draw each year. These restrictions will be removed in April 2015 so pension investors will be able to take the whole of their pension as a lump sum if they so wish, subject to consultation. The first 25 percent will be tax free (in the UK but this may not be the case for tax residents abroad), while the rest will be taxed as income. Should this come to fruition, it takes away one of the most cited objections to funding a pension.
2. Lump sum death benefits
The 55 percent tax charge on certain lump sum death benefits will be reviewed. The UK government believes that a flat rate of 55 percent will be too high, and will engage with stakeholders to review the rules to ensure that taxation of pensions on death is fair under the new system.
Questions and answers
What exactly is the government consulting?
The government is consulting on 'Freedom and choice in pensions'. The negotiations relate to whether the proposed changes will happen, and how. The main points under consideration which could affect investors with private pensions are:
- Ability to take unlimited income from pensions (from age 55, rising to 57 in 2028). The first 25 percent remains tax free, while the rest is taxed as income.
- Review of the 55 percent tax charge on death in drawdown/post 75.
- Review of the tax rules that prevent individuals aged 75+ from claiming pension tax relief.
- Increase in minimum pension age from 55 to 57 from 2028, and further rises after that so it remains 10 years below state pension age.
- A consumer's right to financial guidance at retirement.
- Potential use of (yet to be developed) pension products for social care.
What is the timetable of the consultation?
The consultation will close on 11 June 2014 and the government aims to confirm any changes by 22 July 2014. These changes will potentially be effective from April 2015.
Can I take my pension as a lump sum?
Potentially, yes you could. However it will depend on your individual circumstances and the decision made after the consolation period has closed.
From 27 March 2014 some investors aged 60 or over will be able to take their pension as a lump sum if:
- their total pension savings are under GBP 30,000 (only once), or
- they have individual personal pension pots smaller than GBP 10,000 (maximum three times).
From 27 March 2014 some investors aged 55 or over will be able to take unlimited withdrawals from their pension (through flexible drawdown) if they can prove they have a secure pension income of at least GBP 12,000 a year (including state pension), instead of GBP 20,000 a year.
From April 2015, if the changes above are confirmed after the consultation, everyone will be able to take their pensions as a lump sum.
What happens to investors already in drawdown?
Investors who started income drawdown before 27 March 2014 will remain on their current maximum income until their next annual review date. If the three yearly GAD calculation is due at that review, their maximum income will be recalculated based on the current fund value and that month's GAD rate. They will then be eligible to take 150 percent of the new GAD limit.
Clients not due a GAD calculation will simply move from 120 percent to 150 percent of their existing GAD rate at their next annual review. These same existing drawdown clients may potentially have their maximum income restrictions removed completely in April 2015 if the proposed changes are agreed following consideration.
What happens to investors who have already bought an annuity?
An annuity cannot usually be cancelled once set up, so you are unlikely to have any further options. However, you typically have 30 days to cancel (cancellation period). The start date of the cancellation period will depend on the terms set out by your annuity provider. Some providers are extending their cancellation period.
Is QROPS still beneficial?
So with all of the above changes potentially drastically changing the UK pension industry, will a QROPS still be relevant to expats living abroad?
Is a QROPS still relevant to expats living abroad?
This will unsurprisingly depend on your individual circumstances, but some of the changes in the UK, such as increased drawdown limits, have already been adopted by many QROPS jurisdictions. And when you take into account the other potential advantages of QROPS, using a QROPS still has a many advantages over leaving the pension in the UK. However as some of the proposed changes are yet to be finalised, for some individuals it might be the case that it is better to wait until these findings have been disclosed.
Steven Grover / Expatica
This information is only provided as a guide based on our understanding of current QROPS regulations. If you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.
Steven is a Partner with the Spectrum IFA Group in France. He specialises in assisting expatriates moving to France or already living here with tax efficient solutions for savings, investments and pensions, as well as other areas like mortgages and estate planning. If you have a question, want to arrange a free financial review or would like further information, you can contact him at +33 (0)6 879 80941, via e-mail firstname.lastname@example.org, or via the website www.spectrum-ifa.com.
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