Financial columnist Richard Alexander explores the ins and outs of the UK Budget
WHAT a surprise the Budget was to the pension industry – it has been described as the most radical budget for years.
The announcements made in regard to pension benefits are far reaching and immediately had a negative impact on the share price of companies that specialise in the provision of annuity contracts.
Whilst you may be thinking to yourself that as a Spanish tax resident, the UK Budget does not affect you, but if you have any pension contracts that are in the UK – or originated from benefits in the UK – then you will in all probability have more options available to you now than ever, and even more in prospect from April 2015.
There is so much involved that it is too much for one article, hence the reference to Part 1!
For years, HMRC has been concerned about what it calls ‘Pension Liberation’, the like of which has been going on through the use of QROPS to enable pension funds to be fully surrendered, or ‘liberated’. But now these new proposals will allow total liberation of pension funds from next year. I think it has to be said that whilst this brings many planning opportunities, it also brings a risk and the potential for money to be extracted from pensions and spent now rather than providing for retirement.
This concern has already been raised by Labour politicians, and with a general election due in the UK next year it has to be highly probable that if there is a chance of Government, that these new rules may well be withdrawn or at the very least, watered down.
There is therefore a window of opportunity to look at what the new options are, but sadly I know there will be those in my industry – who call themselves advisers – who will see this as an opportunity to ‘get their hands on’ people’s pension money for reinvestment, regardless of whether it is the right advice. So beware the salesman who may come knocking on your door!
The two key changes, with effect from March 27, are the increase in triviality pension limits and the level of income, which can be drawn from a pension fund.
The triviality limit has been raised from £18,000 to £30,000 and where total pension funds are below this level, the total fund can be surrendered for those over 60. For UK tax payers, up to 25% will be free of tax with the balance being taxable as income. For Spanish tax residents, a different tax treatment will apply.
For people who have been taking advantage of capped drawdown – where the majority of the pension fund remains invested and income is simply drawn from the fund – the income level from their next policy anniversary has been increased. The formula, which applies to UK Government Actuaries Department tables, has been increased from 120% to 150%. This formula is used to determine the maximum pension and will have the effect of increasing this by 25%. More to follow soon!