The Effect of the Budget 2014 on the QROPS Market
In what was described in the papers as “revolutionary” for pensions, the budget did little for pensioners in final salary schemes. But, for those in “money purchase” or “defined contribution” schemes, for example those holding pensions with Aviva and Prudential, they will have much more control over their savings from now on.
Osbourne has taken the child locks off and now is allowing pensioners much more freedom to choose where to invest their pensions and when they can take them.
The real big news is that pensions will become much more flexible and pensioners can now receive 150% GAD rates rather than the standard 120%
This means pensioners can increase their annual income by 25% per year!
However, please note that this does not mean you are 25% better off. This just means for those with defined contribution pensions, you are allowed access to more of your pension income (i.e. more of your life savings) at an earlier point of your life. Of course, this means running out of money quicker and paying more tax on that money which is why Osbourne is busy promoting it. It will fill the Inland Revenue coffers and will help boost the economy with cash going into consumer spending or into stocks and bonds. In fact, the government predicts it will collect more than £3 billion in taxes through the budget change.
Also note, that this increase does not apply to final salary or defined benefit pensions. For those with a company pension, your pension income will be dictated to the custodians of the pension fund.
The new budget changes means that pensioners will pay more taxes earlier and could run out of money quicker. This is a clever political move by George Osbourne as it will boost consumer spending and tax revenues without having to increase the tax rate. It gives pensioners what they want and will probably seal the next election, but long term this could mean more pensioners living off the state and younger people will have to work for longer to pay the bills of pensioners.
The Budget 2014 and Its Effect on Expat Pensions
There was also a surprise hidden in the budget for expats. From the government website:
1.3 Personal allowances for non-residents
To ensure the UK personal allowance remains well targeted, the government intends to consult on whether and how the allowance could be restricted to UK residents and those living overseas who have strong economic connections in the UK, as is the case in many other countries, including most of the EU.
1.4 Capital Gains Tax (CGT): non-residents and UK residential property
As announced in Autumn Statement 2013, legislation will be introduced to charge CGT on future gains made by non-residents disposing of UK residential property. A consultation on how best to produce the charge will be published shortly after Budget. These changes will have effect from April 2015. Legislation will be in Finance Bill 2015.
Ouch. So, expats could have their personal allowances removed. That could mean paying income tax on your entire pension pot. But, we don’t know yet,so for the time being we will assume it is unchanged.
You can see all the budget overview here on the UK government’s website.
As far as the QROPS industry, this looks like it won’t affect QROPS that much, except that a few more people with lower pension pots may decide to stay under UK pension rules. STM Trustees have confirmed the larger 150% GAD rate in drawdown will be applicable in both Malta and Gibraltar.
Yes, there are higher tax allowances in the UK now, so there may be a few less people transferring to QROPS, but the majority of clients who transfer who have 100k+ GBP pension pots could still pay a tax upon death of 55% if in drawdown and will still pay UK income taxes if they elect to stay under UK rules whereas a transfer to a QROPS avoids the 55% tax upon death (which still remains intact for now) and avoids UK income taxes of between 20% and 45%. It also lets them consolidate all their pensions in one place in the currency of their choice and allows greater freedom of what they can invest in.
In fact, if the new rule comes in which removes personal allowances to be paid out to non-residents, this could open the floodgates to people investing in QROPS.
I think this will be great for the UK in the short run, promoting consumer spending, etc, but in the long run, it just means more pensioners with no income coming home to roost from abroad and putting pressure on welfare and UK debt.
This was obviously a budget to get the Tories re-elected, perhaps without Lib Dems as it clearly targeted pensioners.
The budget is a big boost for fund platforms and bad news for the insurance industry. There was also a tightening on rules to cut out tax avoidance and more powers given to HMRC to recover funds. In fact, HMRC can chase you know if you have a bill as low as 1,000 GBP.
Budget 2014 Summary
- The personal allowance will be raised from £10,000 to £10,500. This is the amount you can take as an annual income before you get taxed.
- The 40% income tax threshold will rise from £41,450 to £41,865 on April 6th 2014 and jump another 1% to £42,285 in 2015.
- 25% lump sum remains in tact, but any lump sums above this amount now face just the marginal rate of income tax (20% – 45%) rather than the 55% charge that was imposed previously.
- The income requirement for flexible drawdown has been reduced from £20,000 to £12,000
- The capped drawdown limit has been raised from 120% GAD rates to 150% GAD rates. This means a 25% increase in pension income
- The commutation limit has increased from 18,000 GBP to 30,000 GBP. This means if you have a small pension pot, you can now cash in your pension at retirement rather than having to take an annual income from it.
- The tax-free limit for ISAs has been increased to £15,000, with stocks and shares allowances merged
- No forced purchase of annuity
- The age you can take your pension will likely increase from 55 to 57 in 2028
- From 2015, pensioners will have complete freedom to withdraw as much of their pension as they like and will not be forced to buy an annuity.
Osborne said 13 million “defined contribution” (i.e.” money purchase” or private personal pension) savers were currently forced to purchase an annuity at retirement, but this will now come to an end with “free impartial advice” being given to pensioners at retirement, so pensioners know their options.
This means they can still purchase an annuity if they like, but would be given advice on shopping around for the best deal and they can elect to take a much more flexible income drawdown rather than an annuity.
Osborne said limits on income drawdown and flexible drawdown would be first reduced, then scrapped and “trust” would be handed back to savers.
From 27th March, the amount of guaranteed income people need in retirement to access their savings will fall from £20,000 to £12,000 per year. This means that they can start drawing extra income with a pension pot of around £240k rather than £400k. This means pensioners can get access to higher amounts of their lifetime savings earlier.
The capped drawdown withdrawal limit will rise from 120% to 150% of an equivalent annuity. This means that someone who previously had a pension income of 12,000 GBP per year can now receive a pension income of 15,000 GBP per year, so a pensioner’s income has increased by 25%!
Other Budget Highlights 2014
- Pensioners over 65 can put cash into a 4 year bond and receive 4% per year interest.
- Bingo tax halved (for pensioners).
- Huge increase of 15% stamp duty on corporate property structures.
- Oh and he lit the fuse for a housing bubble with extending cheap credit and the help to buy scheme until 2020.
- But the poor get absolutely hammered – welfare is cut including child benefit and income support, betting taxes have increased 25% and cigarettes have increase around 4%.
- It is also a tax on the younger generation (under 40’s) who will now have to work two year’s longer.
Please email us if you are a British expat and considering retiring offshore, we can help you avoid UK taxes.The Budget 2014 and the QROPS Market - UK Pension Transfers by Richard Malpass