How will the UK pension reform in 2015 affect you

2015 is expected to be a big year when it comes to UK pensions. The UK government have proposed changes to the system, which is designed to give those coming into retirement more access to their pension, and hopefully add more spending power into the UK economy. How this will work in practice is still to be clear but we are starting to get a better picture from the UK government, UK pensions industry and the offshore pensions industry and in particular QROPS.

What are the benefits which have been proposed by the Government:

i) From April 2015 a pension holder can decide how they will take their pension, and how much they will take (this refers to contribution / defined contribution schemes rather than final salary / defined benefit schemes). The individual would be taxed at their current marginal rate in the UK, in most cases 20% as an expatriate.

ii) If an individual wants to access capital from a final salary / defined benefit scheme then they will have the option to transfer out of that scheme into another scheme before taking income from it.

iii) People can pass on their pensions to others without paying any tax. The caveat to this is that the member must pass away before the age of 75 to allow them to pass their remaining pension assets tax free. If the scheme member dies after the age of 75 they can then pass on the income from the scheme at the family member’s marginal rate of tax. If the member passes the pension on as a lump sum and they are over 75 then the pension will still attract a 55% death tax.
There are many interesting questions which come out of the above points, especially for expatriates. We are happy to answer any other questions which you may have. Please get in touch through our website.

Firstly the question of income tax needs to be looked at for an expatriate living in Thailand. Are you happy to pay at least 20% of your pension income to the British Government when you pay virtually zero tax on income if you are placed into the right pension structure through an offshore scheme?

Secondly there are real and valid questions hanging over the Defined Benefit Scheme transfer. The government suggests that there are 18 million such schemes in the UK, if everyone took the option to transfer then the funds available would diminish very quickly and pension companies and insurers would simply not be able to pay. We are seeing already how this should play out, as “unfunded” civil service schemes will not be available for transfer after the new year. The cutoff date is still not clear. An unfunded scheme is basically one where the company is paying current retirees income from money coming in from current employees. If you find yourself in such a scheme then your future income will be paid by the workers of the future, you are paying for the retirees. Our last article covered this, and if you have a teachers / army / NHS pension then it is important to have this looked at before the end of the year.

Finally, critics have questioned whether people could end up struggling financially if they spend all their money after retiring. Earlier this year Steve Webb, the pensions’ minister, said that he would be “relaxed” if pensioners chose to buy a Lamborghini with their life savings. Everyone will have a different view on this but the QROPS industry would be in agreement that the idea of a pension (onshore or offshore) is that is able to provide an income for life of the individual, and then provide for their family upon death. To suggest that an individual spends their pension on luxuries and then lives off a meagre state pension is rather short sighted.

If you have any questions on the above points, or would like clarification on how the changes will affect your pension, we are available through our website or through Inspire.

Please click to speak to one of our local advisors.

Alternatively click for your free QROPS information pack.