IN the last column we looked in brief at some of the Budget changes and how these affect UK pensions; these related to benefits which fall below the triviality limit, now £30,000 (previously £18,000) and how under Capped Drawdown, the income level has effectively been increased by 25%.
Just to clarify, if you have already transferred your UK pension into QROPS, these new rules apply to you too.
Historically, pension funds would have been exchanged at retirement for an annuity contract, which then provides a guaranteed level of income for life, based on terms agreed at that time.
With falling annuity rates over many years now, we have seen the development of options to draw income from pension funds without the need to lock in to an annuity.
Further Budget announcements have now almost sounded the death knell for annuities, which is why the share value of companies specialising in this area fell so sharply following the budget announcements.
For some time now, HMRC have been fighting ‘Pension Liberation’ schemes, which target UK pension funds with a view to extracting money in a way that HMRC would not like. Strangely, the UK Chancellor has now effectively announced pension liberation for all with effect from April next year – a very big surprise indeed!
Whilst not a politically biased person, I do think that this was a very clever move politically because many people will welcome the additional flexibility that the new options will bring. This will be very popular with many and just before the May 2015 General Election too.
It is particularly clever, because people who take advantage of the new rules will in effect be volunteering to pay some tax immediately as an acceptable price to pay to get access to their funds. This means an earlier tax receipt for the Treasury.
Oh and by the way, if those funds are reinvested, they won’t all be in the type of ‘tax free’ environment that pension funds enjoy and the Treasury win again! If alternatively, they go on a spending spree, this is good short term too because it pushes more cash through the economy. Cynic? – not me!
So what’s new? We already had the ability to cash in a certain amount of pension funds; once a sustainable pension income of £20,000 a year had been established, excess funds could then be withdrawn. Tax would be payable but the net fund was then available for other purposes.
The sustainable pension requirement has been reduced to £12,000 with effect from March 27 this year and from April 2015, there will be no requirement at all for any level of sustainable pension. If you want to take your whole fund, then you can do so.
For UK taxpayers, marginal rates of income tax will apply to any funds withdrawn in excess of the 25% tax free amount. For Spanish tax residents – that’s all down to a matter of interpretation and you will need to speak to your tax adviser.