Guide to UK Pension Freedoms
What Happened?
You've worked hard for your retirement, but before you can start enjoying it, you'll need to decide how your pension will provide the income you need to live on.
In March 2014, the then Chancellor of the Exchequer, George Osborne, announced a radical reform of the pensions system to give people greater flexibility to access their pension savings. The new pension freedoms took full effect from 6 April 2015 and have given retirees a whole host of new options.
There is no longer a compulsory requirement to purchase an annuity (a guaranteed income for life for a fixed number of years) when you retire. The introduction of pension freedoms brought about fundamental changes to the way we can access our pension savings.
Pension freedom rules mean those aged over 55 no longer have to purchase an annuity to access their pension income but can instead enter drawdown or take a cash amount. There is now much greater flexibility around how you take your benefits from Money Purchase Pension (Defined Contribution) schemes, which includes Self- Invested Personal Pensions (SIPPs) or Qualifying Recognised Overseas Pensions (QROPs).
This was a genius move by the UK government. It gave them increased popularity and an initial hike in taxes collected from the member's income tax and the VAT collected on whatever the person spent the money on. The famously quoted pensions minister at the time Steve Webb said: "If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice."
Even more interesting for expatriates is that some can withdraw all their money in one go and pay tax at a rate of zero, meaning they alleviate their entire pension from future income tax. Several variables include a persons age, country of residence, pension jurisdiction, and type plus temporary non-residence rules. Specialist advice should be taken.
Since the rules governing how pensions can be taken have been dramatically relaxed, more people are using pension freedoms to access their retirement savings. Still, the amount they are individually withdrawing has continued to fall, according to the latest data from HM Revenue & Customs (HMRC).
Pension freedoms have given retirees considerable flexibility over how they draw an income or withdraw lump sums from their accumulated retirement savings. There is no doubt the pension freedoms have been hugely popular.
What Are My Options to Drawdown?
The way to think of your personal pension from now on is like an investment held in the pension system. Within reason, you can invest in just about anything and withdraw any amount subject to income taxes. This means that your retirement income can literally be designed around your needs.
Receive a guaranteed income (annuity).
You can use your whole pension pot, or part of it, to buy an annuity. It typically gives you a regular and guaranteed income. You can generally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into an annuity, providing a taxable income for life. Some older policies may allow you to take more than 25% as tax-free cash. We can review this with your pension provider. Different lifetime annuity options and features to choose from affect how much income you would get.
Receive an adjustable income (Flexi-access drawdown).
With this option, you can typically take up to 25% (a quarter) of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income.
You set the income you want, though this might be adjusted periodically depending on your investments' performance. Unlike with a lifetime annuity, your income isn't guaranteed for life, so you need to carefully manage your investments.
Take cash in lump sums (drawdown).
How much and when you take your money is up to you. You can use your existing pension pot to take cash as and when you need it and leave the rest untouched, where it can continue to grow tax-free. For each cash withdrawal, usually, the first 25% (quarter) is tax-free, and the rest counts as taxable income. There might be charges each time you make a cash withdrawal or a limit on how many withdrawals you can make each year. With this option, your pension pot isn't re-invested into new funds specifically chosen to pay you a regular income, and it won't provide for a dependent after you die. There are also tax implications to consider that we can discuss with you.
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 received a pack from your pension provider, but that doesn't mean you have to take the money now. If you delay taking your pension until a later date, your pot continues to grow tax-free, potentially providing more income once you access it. As pensions do not form part of the member's estate, they can be effective IHT planning tools.
Mix your options.
You don't have to choose one option: you can mix them to bespoke your income to your retirement needs.
Cash in your whole pot in one go.
You can do this, but there are certain things you need to think about. There are clear tax implications from withdrawing all of your money from a pension. Taking your whole pot as cash could mean you end up with a large tax bill – for most people, it will be more tax-efficient to use one of the other options. Cashing in your pension pot will not give you a secure retirement income.
Checklist for pension freedom with zero tax:
- You need to have been out of the UK or intend to stay outside the UK for five complete tax years
- Your pension needs to have Flexi access (SIPP or QROP)
- You have to be over 55
- The country you live in must have a 0% income tax on foreign pensions
- The country your pension is located in must have a tax treaty with the country you are resident in that passes taxes rights to your country of residence.
The main two pension jurisdictions that make a 100% tax-free withdrawal possible are the UK (SIPP) and Malta (QROPS) and the countries that this is possible with are the UAE, Qatar and Saudi Arabia and Malaysia (SIPP only). Due to all the tax relief HMRC give to UK pensions; generally, the UK and Malta's tax treaties only pass taxing rights to counties with income tax. So if you are over 55, living in the GCC and have any pensions, it would be wise to explore your options.
Your Financial situation at retirement.
The way you draw an income from your pension is likely to be primarily determined by your retirement financial situation. For example, will you still be paying off your mortgage, or do you have any other significant debts? What other income sources, aside from the State Pension, will you have at your disposal?
While an annuity can offer you the security of a guaranteed regular income, a drawdown plan gives you the chance to grow your pension and overall wealth during retirement. The latter route is likely to suit those with a higher risk appetite, as any significant market swings could potentially cause severe damage to your pension savings.
THINK CAREFULLY BEFORE MAKING ANY CHOICES
The pension flexibilities may have given retirees more options. Still, they're also very complicated, and it's essential to think carefully before making any choices that you can't undo in the future. Withdrawing unsustainable sums from your pensions could also dramatically increase the risk of you running out of money in your retirement. Want to find out more? Get in touch to talk to us about your current situation or to arrange a meeting.
For more Expat focused information please visit www.expatwealthadviser.com
