HMRC to Shake Up Pension Tax Rules in April 2015
HMRC are introducing sweeping changes to the pensions industry. Here is how the pension tax rules may pan out on April 6th, 2015.
Effect on UK Final Salary Schemes
- Transfers from private sector Final Salary Schemes, known as Defined Benefit (“DB”) Schemes to a SIPP or QROPS can still go ahead, however, this will only be allowed following the receipt of financial advice from an FCA regulated company. It is unclear yet as to whether there will be any allowance for advisory firms regulated in other territories. Exact details of this will follow in the proposed legislation
- As expected, transfers from unfunded public sector schemes (e.g. NHS, civil service, teachers and the armed forces) to defined contribution schemes will no longer be permitted, however, transfers from funded DB schemes will be permitted (e.g. some local government pension schemes)
- There will be further consultation on the ability to take partial encashments from Defined Benefit Schemes, although it is not clear how this would work in practice
Effect on Tax in the UK
- The Government will act to ensure that individuals do not exploit the new system to gain unintended tax advantages.
- It has been confirmed that the government see the 55% tax charge on death as too high and it will be amended in the Autumn statement. There is no indication that this will be removed and the market consensus is that bringing it into line with IHT (40%) or highest marginal rate of income tax (45%)
- A Pensions Tax Bill will be introduced in the Autumn to introduce the required tax changes, and draft legislation and a further consultation document will be issued in August 2014 on this.
Effect on Overseas Pension Transfers (QROPS) for Expats
- The Government recognises that the changes to the pensions tax rules outlined in this chapter will have implications for the rules relating to Qualifying Recognised Overseas Pension Schemes (“QROPS”). The Government will consider these implications further to ensure that the rules relating to QROPS are appropriate when the new system comes into force.
- Annuity rules will be changed to allow a guarantee period of greater than the current 10 years, to provide a lump sum in the case of early death. A longer guarantee period will have the effect of a reduction in the annuity rate available.
In summary, the changes proposed in the UK Budget are to go ahead with a few slight changes (Final Salary Scheme transfers will be allowed) although HMRC are aware that there are “Tax planning opportunities” and as such are introducing a Pensions Tax Bill in the Autumn to protect against unintended consequences. They are also looking at QROPS rules to ensure they fit the new regime.
There is also talk of scrapping personal allowance for income tax for expats, although this is just speculation at this time. If this was the case, this would mean British expats who leave their pension in the UK would be income tax on their ENTIRE pension.
Analysis of the New Pension Tax Rules for 2015
Public sector pensions are seriously underfunded to the tune of £1.2 trillion which is the equivalent of £45,000 per household, and the debt is increasing rapidly as the government can’t cover its obligations. This is compounded by the fact that people are living longer and pensions will have to be paid out for longer.
The Government says total outstanding public sector pensions liabilities are equivalent to 53% of GDP (total UK national income). The IEA/IOD puts the true cost at 74% of GDP. Towers Watson, a highly-respected group of actuaries, calculates total liabilities as no less than 83% of GDP. That is higher than our national debt.
With a low interest rate environment, final salary schemes are receiving particularly high valuations. If every British expat transferred out, the government would be in serious trouble. Doctors, nurses and teachers have until around October to realistically get their QROPS applications in as it takes 3 – 6 months to transfer.
The Government Stance on Public Sector Pension Schemes Going Forward
The government has said the level of pension being offered to public sector workers is unsustainable because of increasing life expectancy, and has decided public sector workers should:
- Work until age 68 instead of age 60 before receiving their pension;
- Contribute more towards their pension, an average increase of 3.2 percentage points (not percentage), although those earning under £15,000 a year will be exempt from the increase and those earning £15,000 to £21,000 will have contributions capped at 1.5%;
- Receive less when they retire due to a shift away from final salary and towards a ‘career average’ scheme;
- Have pensions increased in line with the consumer price index (CPI) rather than the more generous retail price index (RPI).
We are recommending clients who have public sector pension schemes to transfer out whilst they still have the chance.
It takes 3 – 6 months to transfer the pension and the deadline is April 6, 2015, so there are only a couple of months left to transfer.
We will also do a free transfer value analysis, so that you can make an informed decision on whether to transfer to a QROPS or keep it within the UK tax system.New UK Pension Tax Reform Act 2015 by Richard Malpass