UK Pension Changes 2015

There has been a lot of talk and communications over the past 6 months on the transfer of UK pensions to an Australian superannuation fund. However of late the “QROPS” process has been effectively placed on hold. Another important reform in the UK impacts the way you can access your defined contribution pension savings from age 55. These have changed and possibly opens up new alternatives so we spoke with UKPT’s principal adviser Mark O’Loughlan about what these can be.

What has changed and how can you access your pension savings post April 2015?

From 6 April 2015 the UK government have brought into place new rules on how you can access your pension funds once you obtain age 55. Under the new rules you can now access potentially as much of your savings from your defined contributions pension scheme (also known as ‘stakeholder, ‘personal’ and ‘money purchase’ schemes, see like below for more) as you wish to draw under new ‘pensions flexibility’ rules.

“A key point however is that UK schemes do not have to offer these options,” commented Mark when asked if this applies to all UK pension funds. You can however transfer your pension savings to a pension provider that does offer the flexibility to do so. Let’s look at the rules in more detail.

You can access your benefits in a number of different ways:

Lump sum payment

You can draw money directly from your pension pot without having to buy an annuity or put the money into ‘drawdown’. Upto 25% of this sum will be tax-free in the UK, however it may not be in Australia (if you are a tax resident in the eyes of the ATO) and you may need to consult further to understand the implications of drawing such a lump sum. This is called an uncrystallised funds pension lump sum (‘UFPLS’). You can take one or more UFPLS payments and these can be regular or irregular payments.

The tax-free benefit is very appealing to many expats living in Australia however O’Loughlan commented at this point “it’s a common misconception that the ‘tax-free’ status of the amount taken from a UK fund also applies in Australia if you are a tax resident. It may not depending on your circumstances and it is vitally important to consider the tax impact personally before doing so”.

Lifetime annuity

You can also use some, or all of your pension funds to purchase an annuity that will be payable at least for the rest of your life, and possibly to a surviving spouse depending on the scheme rules.

You can take a tax-free (in the UK) lump sum of up to 25% of your pension pot when you buy an annuity. This is called a ‘pension commencement’ lump sum.

Ed: “Mark what are the implications of doing so? Surely an income stream payable for the rest of your life would be attractive?”

MO: “Yes absolutely, however you need to consider three main points if you are a tax resident in Australia: (1) long term impact of foreign exchange on your income stream, (2) taxable nature of the UK sourced income in retirement versus the current tax-free nature of superannuation pensions and; (3) estate planning and longevity. If the primary member is survived by their spouse, often a part pension, sometimes 50%, is payable to the surviving spouse for the remainder of their lifetime. However this is effectively a 50% reduction in capital upon the primary members death, especially if you die a lot sooner than your life expectancy and unfortunately that’s one aspect of retirement planning we can’t predict”.

Flexi-access drawdown

You can also place your pension funds into drawdown. From 6 April 2015 there are no limits on how much or how little you can take from your drawdown fund each year. You can take a tax-free (in the UK) pension commencement lump sum of up to 25% of your pension pot when you convert your funds into drawdown phase. Any drawdown payments are assessed as income.

Capped Drawdown

If you are already in a capped drawdown scheme before the changes in April came into effect, then you can continue in this mode however no new capped drawdown funds or flexible drawdown funds may be set up from 6 April 2015 onwards.

“If you are in a capped drawdown fund then you may either convert your fund into a flexi-access drawdown fund, or continue to take a capped drawdown pension from your present arrangement, i.e. no change”, commented Mark.

You can however add additional funds to your existing capped drawdown arrangement/s, where your existing annual pension limits and review periods for capped drawdown will continue to apply. Capped drawdown payments are also assessed as income.

Short term annuities

If you are in drawdown phase you can also elect to receive benefits in drawdown phase by purchasing short term annuities. These are paid by insurance companies at least annually and for no more than 5 years.

Overseas pension schemes (including QROPS transfers)

Changes made to the legislation covering pension savings in overseas schemes bring them in line with the 2015 changes made to the rules for UK registered pension schemes.

These changes affect:

• qualifying recognised overseas pension scheme (QROPS) – schemes that can receive transfers from registered pension schemes as authorised payments, i.e. tax-effective transfers that occur no tax in the UK if transferred to a registered scheme in Australia.
• currently relieved non-UK pension schemes – where UK tax relief has been given on or after 6 April 2006 in respect of pension savings under the scheme

Collectively, these schemes will are known as ‘relevant non-UK schemes’ and will be subject to similar rules as UK registered pension schemes.

When asked what UKPT’s current approach is to transfers, Mark’s response was very clear: “Holding pattern. No-one should be proceeding with a transfer at the present time until the outcome of the HMRC’s consultations are clear.

“We’ve seen a SMSF that appears to be restricted to over-55 aged members be registered and added to the ROPS list, however we take a conservative line presently. We do not wish to act too hastily and have the client possibly in the position of facing an unauthorised member payment charge because we did not allow the bureaucratic process to run its course”.

Tax on payments and contributions

All payments you receive from an annuity or drawdown are assessable as income. You also will be assessed for income tax in the UK on any amount of any UFPLS you receive over and above the 25% tax-free lump sum or ‘pension commencement’ lump sum. The amount of tax you pay will depend on the amount of payments that you receive in the tax year plus any other taxable income you have. Any tax payable will be recognised in Australia under the tax treaty between the two countries.

Defined benefit or company pension schemes

You may be thinking “I was a member of a company final salary or defined benefit (‘DB’) scheme – does this affect me?” The above information relates to defined contribution schemes and the ability to access the UFPLS rules, which will not be the case for a DB or final salary scheme. However you may have the option to roll from a scheme of this type to a personal scheme that does offer the UFPLS benefits.

Mark quickly added a point of caution: “It needs to be said that taking this course of action may not be the best path for all individuals. Some DB schemes come with very generous pensions therefore it may not be in your best interest to roll out of these style of pension funds. Don’t be tempted or sold on the promise of easy access to large lump sums without thoroughly understanding the consequences first. You must seek qualified advice and preferably from a firm that specialises in this area”. Wise advice indeed as your decision may not be reversible.

If you would like to discuss these new changes and how they may relate to your personal situation, please do not hesitate to contact us on +61 7 3354 9000 or email enquiry@ukpt.com.au to speak with one of our advisers.

Important Update

At the time of writing, the HMRC has deregistered on 17 June 2015 some 600 Australian QROPS registered superannuation funds due to their concerns about the ‘early access provisions’ available to members under the age of 55 (specifically permanent incapacity and financial hardship). These provisions do not exist in the UK.

Comments/Questions?