UK pension reforms: changes ahead
IOOF TechConnect Team
Last year the UK Government announced sweeping reforms to the UK pension rules. The IOOF TechConnect team take a look at the changes taking affect this April.
Last year the UK Government announced sweeping reforms to the UK pension rules to commence from April 2015. The intention of the Government is to provide UK retirees with greater flexibility and freedom of choice as to how they take their retirement income. The changes passed into law on 17 December 20141.
The changes will have a major impact on the type of transfers permitted to Qualified Recognised Overseas Pension Schemes (QROPS).
Pre 6 April 2015 UK pension arrangements
Currently UK pension schemes provide either defined benefit or defined contribution pensions from age 552. Under defined contribution ("money purchase") schemes, individuals can purchase either a guaranteed lifetime pension/annuity or a drawdown pension (similar to Australian account-based pensions) with their accumulated savings. These drawdown pensions are either:
- Capped drawdown - where the amount drawn down is restricted to a maximum of 150 per cent of an equivalent annuity, or
- Flexible drawdown - these have no restrictions but the individual must be already receiving a guaranteed annuity of at least £12,000 pa.
Access to lump sum benefits from age 55 is limited, however individuals can take 25 per cent of the purchase price of their defined contribution pension as a tax-free lump sum but the rest must be taken as a pension.
UK pension reforms from 6 April 2015
The rules for new guaranteed income streams will be relaxed, with term certain and reducing annuities/pension permitted. New annuities will be able to provide lump sum withdrawals.
All new drawdown pensions will be "flexi–access", with no restrictions on the amount of pension payment withdrawn. Although the option to take a 25 per cent tax-free lump sum on commencing a pension remains, individuals will no longer need to commence a pension to take lump sum withdrawals from their retirement savings from age 55. Lump sum withdrawals from accumulation phase3 will be allowed and will be 25 per cent tax-free and 75 per cent taxable at the individual's marginal rate.
As a consequence, the 55 per cent unauthorised payments charge will effectively cease for those aged 55 or more, and any benefits withdrawn will be taxed at the no more than the marginal rate. The unauthorised payments charge will still continue for unauthorised withdrawals before age 55.
There will be also changes to the "annual allowance" for individuals who commence flexi-access pensions or elect to take a lump sum withdrawal under the new rules (25 per cent tax free, 75 per cent taxable) after age 55. Currently up to £40,000 p.a. (the "annual allowance") can be contributed to pension schemes with tax concessions4. However from 6 April 2015 this will reduce to £10,000 for those referred to above.
Changes affecting QROPS transfers from 6 April 2015
Most of the reforms relate to defined contribution pensions and lump sums payable in the UK, however there are significant changes that will have a major impact potential transfers to Australian QROPs:
- From 6 April 2015, transfers will no longer be allowed from unfunded defined benefit Government schemes to defined contributions schemes in the UK or elsewhere (including Australian QROPS). This is because commuting an unfunded benefit has a bring-forward cost to the Exchequer. Unfunded UK public sector
schemes include those for teachers, police, army, public servants, NHS and university staff.
Advisers note: For many advisers this will be of major concern as former public sector employers are a key market for transfers to Australian QROPS. Consequently it is important that any such clients intending to transfer their benefits to a QROPS, commence the process as early as possible so the transfer occurs before the deadline.
- Transfers from funded Government defined benefit pension schemes (such as the Local Government Pensions Scheme) will still be permitted, however transfer values may be reduced if, due to the number of transfer requests, there is a risk taxpayers would be required to top up the scheme.
- Funded defined benefit schemes can only transfer a benefit out of the scheme if the individual has received independent financial advice from a professional financial adviser authorised by the (UK) Financial Conduct Authority. The adviser must be independent from the scheme.
Advisers note: Financial planners authorised under Australian Financial Services Licenses are not authorised by the FCA. Clients in UK defined benefit schemes intending to transfer to an Australian QROPS from April 2015 must receive advice from a financial adviser authorised by the FCA.
- Some members who transfer UK pension monies to an Australian QROPS may have (or still are) contributing to pension schemes under the UK rules. The reduced annual allowance of £10,000 will also apply to these members if they commence an account based pension with the Australian QROPS while still within the UK tax residency period.
|The countdown to 6 April 2015 changes has started and, particularly in relation to those clients in unfunded public sector schemes, the need for early action is paramount|
Transferring from an unfunded public sector scheme in the UK to an Australian QROPS can take weeks or months, and this will be further complicated by the numbers of individuals wanting to transfer out of these schemes before the deadline.
Even where clients are in funded defined benefit schemes, post 5 April 2015 advice arrangements will be more complicated as clients intending to transfer will be required to receive advice from UK advisers who may have limited understanding of the Australian superannuation environment. That is not to say that Australian advisers will no longer be able to advise on transfers from the UK to Australian QROPS come 6 April 2015. These conditions don't apply to defined contribution schemes and increasingly UK arrangements are defined contribution rather than defined benefit.
For more information on QROPS and the TechConnect fact sheets, please call your relationship or business development manager.
- UK legislation made into law 17 December 2014: Taxation of Pensions Act 2014 and Pensions Schemes Act 2014. Draft regulations under these Acts have also been released covering information requirements for QROPS - Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015 (draft)
- The requirement to compulsorily commence a pension at age 75 was removed in 2010.
- Called Uncrystallised Funds Pension Lump Sums (UFPLS)
- The Annual Allowance can be topped up by any unused annual amount from the previous 3 tax years