In April 2015, the tax rules were changed to give people greater access to their Defined Contribution Pensions (personal pensions).
In a nutshell, the new ruling nicknamed “Pension Freedom” allows people to access all of their pension pot as a cash lump sum. The catch is that anything over the 25% Pension Commencement Lump Sum (PCLS, which is tax free in the UK) will be added to your income in that year and taxed as income. This means most people will be paying higher rate tax of 40%, in effect loosing up to 40% of their pension pot just to access their money.
There are now six retirement options that you should consider.
• Option 1- Leave your pension pot untouched for now and take the money later.
It’s up to you when you take your money; you might have reached the normal retirement date under the scheme or got a pack from your pension provider but that doesn’t mean you have to take the money now. If you do not take your money, you should check the investments and charges under the contract.
• Option 2- Get a guaranteed income (annuity)
You can use your whole or part of your pension pot to buy an annuity. It typically gives you a regular and guaranteed income. There are different types of annuity available.
• Option 3- Get an adjustable income (drawdown)
You can usually take up to 25% as a tax-free cash sum. The rest of your pot is invested to give you a regular (taxable) income in retirement.
• Option 4- Take cash in chunks (drawdown) How much and when you take your money is up to you. 25%, of every chunk, you take is usually tax-free, the rest is taxable.
• Option 5- Cash in your whole pot in one go
You can do this but there are certain things you need to think about. You have to consider how much tax you pay on the amount you take out and you have to think about what you’ll live on in retirement. You could end up loosing over 40% of your pension pot in tax.
• Option 6- Mix your options
You don’t have to choose one option you can mix them over time or over your total pot.
In the Spring Budget of 2017 the government announced a new 25% tax charge to apply to transfers to and from Qualifying Recognised Overseas Pension Schemes (QROPS) with effect from 9th March 2017.
This new rule now makes transfers of UK pensions to QROPS very difficult for expatriates not living and working in the EEA. However, for those still wishing to consolidate various UK pensions, or wish to move benefits from a Defined Benefit Scheme, this can still be achieved by using a UK Self Invested Pension Plan (SIPP)
The new ruling now means that transfers to and from QROPS requested on or after 9th March 2017 could be subject to a 25% tax charge. The exception to this are transfers where, at the point of transfer, both the individual and the receiving QROPS scheme are in the same country, both are within the European Economic Area (EEA), or the QROPS is an occupational pension provided by the individual’s employer.
The 25% tax charge will be deducted before the transfer by the scheme administrator, or scheme manager of the pension scheme making the transfer.
This now makes transfers of UK pensions to QROPS very difficult for expatriates not living and working in the EEA. However, for those still wishing to consolidate various UK pensions, or wish to move benefits from a Defined Benefit Scheme, this can still be achieved by using a UK Self Invested Pension Plan (SIPP). These give a lot of the same benefits as a QROPS, except the pension will remain subject to UK tax.
However, depending on where you are planning to retire and take your pensions, the UK has numerous Double Taxation Agreements which could help reduce the tax you pay on your pension
In order to determine the best solution for you, meet with one of our advisers, who will asses your current situation,
or issue that you want addressed, and will construct an effective affordable solution specially tailored to fit your needs.