Your Pension Lump Sum Might Be HALVED Under New UK Pension Proposals
Have you got a UK pension of £200,000 or more? The amount of cash lump sum you receive in retirement might be cut to £36,000 Instead of £50,000 under newly proposed pension rules in the UK.
If you have a pension pot of more than £144,000 you would be affected and have your lump sum capped. That means if you are only 50, you only need a current pension of around £60,000 for it to be affected if you retire at 65 and your pension grows at 6% p.a. So, this could have a far reaching affect.
Ed Balls has revealed he would cut pension tax relief and cap pension lump sums if Labour were to be elected in 2015. However, the current government may also decide to cap the amount of cash a pensioner in the UK could get access to. This all stems from a report by the Pensions Policy Institute which released a paper in June this year in which the PPI has made suggestions to the UK government concerning pension changes. The new proposals would hit the highest rate tax payers in the UK.
In their press release, they state,
Tax relief offers important advantages to pension savers, but does little to encourage pension saving, particularly among low and medium earners
The main gripe is that some higher rate tax payers get higher tax relief when making payments and then just pay basic rate of tax at retirement. PPI is trying to redress the balance to encourage more lower and middle rate savings, at the expense of higher rate tax payers. Here is their full paper.
What would the new tax relief rate be? PPI have suggested a flat rate of 30% across the board rather than the current tiered system. Previous statements by Mr Balls have nodded towards a 20% cap for those earning £150,000 or more. Party leader Ed Miliband has suggested a 26% cap across the board in the past as well.
This is on top of proposals to fade out personal allowance for higher rate tax payers which have been written in the plan for future budgets.
This will have far reaching consequences for higher rate tax payers and could mean that their pensions could be capped at £36,000. This could be a shock to the system for pension savers who have built up a large pension. For example, on a £400, 000 pension, normally they could expect a £100,000 lump sum at retirement. However, under the new proposed pension rules, higher income rate tax payers would receive only £36,000. A fall in the cash amount at retirement of £64,000. That will be a big shock to the system, particularly for divorced expats who may need this money as a down payment on a new flat.
For British expats or Brits who are looking to retire abroad, you can do something about it before the new pension rules kick in. You can transfer your pension offshore to a Qualifying Recognized Overseas Pension Scheme (QROPS) in a secure jurisdiction such as Gibraltar or Malta and take a 30% lump sum (as long as you have been living outside the UK for five years). This means getting a lump sum of £120,000 instead of the measly £36,000 under new proposed rules. Furthermore, they can take 50% of any increase in their pension pot after transfer every 3 years.
So, if someone has a £400,000 pension and transfers to a QROPS in Malta, they could take £120,000 upfront. Then in 3 years, they could take 120% of GAD rate plus 50% of any increase in pension. This could means receiving a pension income of around £16,000 with an extra £26,000 in year 3 as a lump sum. You can take these extra lump sums every 3 years. A transfer offshore allows you to receive a much higher income and higher cash lump sums. You also have the choice to invest in the mutual funds, gilts, treasuries, bond funds or ETF’s that you wish as well as choosing which currency to transfer your pension into.
The latest poll on 10th October has Conservatives on 32%, Labour 38%, LD 11% and UKIP 13%.
Bloomberg’s poll last month suggests that Labour will win the 2015 election, so these proposals may not be far off. If you are retiring outside the UK and want to move your pension offshore to a QROPS, it takes 3 – 6 months to transfer out.
In last month’s article, we looked at how currencies affect your pension and why it may be better to transfer your UK pension to EUR or USD rather than GBP if you live abroad. A typical pension in Europe based in GBP has lost over 22% in value over the last 5 years for instance.Your Pension Lump Sum Might Be HALVED Under New UK Pension Proposals by Richard Malpass