In his annual budget the UK finance Minister George Osborne announced some sweeping changes to the treatment of pensions which should be of interest to any expatriate with retirement benefits in UK.
The changes have been hailed as the most radical shake up in UK pensions in almost a century. So what’s happening? The key message appears to be that the UK government wants you to take more control of your pension arrangements and they are willing to be more flexible on the way you do that. There are two phases of the changes, the first will come into effect on 27th March this year and the next phase on 6th April 2015, as there need to be changes in legislation to make them happen.
As a re-cap: retirement savings plans in UK fall into 2 camps: defined benefit and defined contribution. The defined benefit is not the topic of the Chancellor’s reforms, he is concerned about defined contribution schemes. Defined contribution schemes are any schemes where you pay in an amount each month from your pay packet but you do not know what the ultimate benefit will be as this will depend on the investment performance of the funds you are investing in.
At present, pensioners coming up to retirement had a stark choice, they were permitted to take 25% of the fund value as a one off lump sum with no liability to UK taxes and then, for the majority of people, the balance was given to an insurance company in exchange for a guaranteed income for life. The product used to provide this guaranteed income is known as an annuity and annuity rates are linked to long term interest rates. Since long term interest rates have been very low for about 5 years pensioners have been getting very low returns for their life’s savings. Even those with larger sums who elected the more risky option of managing their pension by investing in stocks and shares were restricted on the amount of income they could draw, this amount being set by the Government Actuarial Department (GAD) which set rates based on the same long term interest rates.
With effect from 27th March the amount that pensioner will be able to take out of their pensions under the GAD rules will be increased by about 25% enabling higher incomes to be generated for the same amount of money.
Also from 27th March, those aged over 60 with less than £30,000 in total invested in defined contribution schemes will be able to access the full value of their pension immediately spread across three payments.Although they will probably pay tax on the amount in excess of the 25% lump sum.
With effect from April 2015
- The amount of income a pensioner will be able to draw from their pension pot after taking the lump sum will be 100% of the value of the fund. This will be taxed as income at the pensioner’s normal rate of income tax, which will be 20% for most people.
- All members of defined contribution schemes will be able to access 100% of their fund at age 55 however the notes to the budget suggested that the minimum age will rise in line with the state retirement age and for private pensions could be 57 by 2028.
- Death benefits paid to dependents are currently taxed at 55%, HMRC has acknowledged that this is too high and are to enter consultation with the financial services industry to reach a compromise.
So big changes in the pensions arena. This will have an effect on anyone thinking of transferring their pension and any recommendations made but not yet acted upon will need to be revisited.
If you have any questions, comments or concerns please let me know.