Pension Freedoms by Richard Samuels, International Financial Adviser, Blacktower Finanancial Management
Two years ago, saw the most radical changes to private pensions for a generation, with the slogan being ‘Freedom and Choice in Pensions’. The Government announced these pension freedoms in the 2014 Budget to start in the 2015/16 tax year.
Typically, most pension schemes allow for a tax-free (only if you are a UK tax resident) Pension Commencement Lump Sum (PCLS) of up to 25% of the value of the pension, yet for decades most people had effectively needed to use the remainder of the money to buy an annuity – a product that pays you an income each year until you die.
Pension Freedoms has meant that anyone aged 55 has numerous options; they can take their whole pension pot as a lump sum, paying no tax on the first 25% (if tax resident in the UK) and the rest taxed as if it were a salary at their income tax rate. Invest it in an alternative pension scheme, or take flexible drawdown from their current scheme (not all schemes allow this).
While this sounds like a serious bonus, especially as there are many more options, it also means for inexperienced expats it’s easier to make a mistake.
Pension Freedoms apply to private pensions where you and/or your employer saved up a pot of cash for retirement. Technically these are known as ‘defined contribution’ or ‘money purchase’ pensions. Pension Freedoms do not apply to state pensions.
Pension Freedoms has also effected final salary pensions, whereby you can take control of your final salary pension (certain exceptions apply) by requesting a cash equivalent transfer value which can then be paid into a new defined contribution scheme such as a SIPP (self-invested personal pension) or a QROPS (Qualifying Recognised Overseas Pension Scheme).
Current low interest rates and low returns on Government bonds have caused transfer values for Final Salary schemes to reach record highs.
Sky-high ‘transfer values’ are one reason ex-pats are transferring out of these schemes in droves. Flexibility over how you can use your money, including passing unused cash on to the next generation, is a further appeal of doing a transfer.
Another reason is the current Pension Deficit Scandal, typified, by the problems with BHS last year. Many of these scheme’s liabilities far outweigh their assets and they have now closed to new members. With people living longer, the schemes are struggling to keep up.
With many schemes looking to reduce their liabilities, some are offering enhanced rates to get members off their books. Expats are taking advantage and are often offered 20 to 30 times the value of the annual pension as a transfer value.
Pension Freedoms have also brought changes to the way people can take withdrawals from their pension pots.
Most schemes allowed for ‘Capped Drawdown’ after you had taken your tax-free amount. The amount you could withdraw is fixed by the Government Actuary Department (GAD) and determined by your age and current life expectancy. ‘Capped Drawdown’ schemes are still common and the amount you can take as income is currently capped at 150% of the GAD rates. These are reviewed every three years if you are under age 75 and yearly after this. On each review date, a new maximum income is calculated – and is fixed for that period.
After the new Pension Freedoms, if you wanted to take more money than was allowed via ‘Capped Drawdown’ you had an alternative called ‘Flexi-access Drawdown’.
With ‘Flexi-access Drawdown’, you can withdraw as much of your pension as you wish, thereby giving you full control of your income. You can take as much or as little (or nothing at all) as and when you need it, or on a regular basis.
Both ‘Capped Drawdown’ schemes and ‘Final Salary’ schemes (with an appropriate Transfer Value) can be transferred to a new SIPP or QROPS offering this facility.
If you have a pension, then a review of your financial position would be a sensible option in view of the above, so please contact me on 692 352 156 or email email@example.com
I can also help you track lost pensions, including personal pensions or occupational pensions and schemes used to ‘contract out’. If you have lost touch with a pension scheme since moving to Spain we can contact them on your behalf to find out what your pension entitlement may be.
For further information contact:
Richard Samuels, International Financial Adviser,
Blacktower Financial Management (International) Ltd
Tel 965 02 04 02 Mob: 692 352 156
The above information was correct at the time of preparation and does not constitute investment advice and you should seek advice from a professional adviser before embarking on any financial planning activity.
Blacktower Financial Management Ltd is authorised and regulated in the UK by the Financial Conduct Authority and is registered with both the DGS and CNMV.
Blacktower Financial Management (Int) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) and is registered with both the DGS and CNMV in Spain.