Pension Pots Under Attack

A host of changes are coming in April regarding pensions. The lifetime allowance on UK pension pots will be reduced from £1.5mn to £1.25mn, putting hard-working savers at risk of facing up to 55% in taxes.

These modifications were outlined in the Autumn Statement 2013, and included changes to company, private and state pensions.

Effectively, the new rules mean you can save less for your retirement, may have to retire later and, if you save too much, you will be heavily taxed.

Starting in April, pensions worth over £1.25mn may be hit with a tax bill of up to 55% of the value of savings above that threshold.

Some of you may think this doesn’t apply to you, as you don’t have that much money in your pension account(s). However, the tax also applies when your portfolio grows.

A pension pot of £1.6mn, for example, could be charged £192,500 in tax (£350,000 x 55%) if the pensioner withdraws the total as a lump sum.

What’s more, any additional funds received in salary pension income will incur an extra 25% in taxes. And this doesn’t even touch on the 55% death tax levied on UK pensions.

However, there are things you can do to protect yourself, and to safeguard your income and family wealth.
In my professional experience, individuals usually don’t know three important things when it comes to their pensions:

• What their pension is invested in
• Who is managing the account(s)
• The pension’s true value

Recently, I have been meeting with many clients, not to review if these changes will affect them, but rather by how much.

The client usually asks incredulously, “My pot of money isn’t worth £1.25mn? But what about in the future?” The Liberal Democrats are already targeting a long-term allowance of £1mn—millionaire pensioners ring any bells here?

As portfolio values go up and the true value of money goes down, many people will reach this financial threshold sooner than they think.

If you are 10 or more years from retirement with a pension pot worth £650,000, plus a salary pension income of £45,000, you may be at risk of exceeding the £1.25mn taxation limit in your lifetime.

It is simple to start the required planning for individuals, and doing so can lead to savings worth hundreds of thousands of pounds in the long run.

What you can do
First, review your current situation. Complete a Letter of Authority to request information packs from each pension scheme provider with which you have invested money.

We can then work out the total value of your funds, and calculate future growth and contributions. Based on this, we can look at potential tax-planning options and solutions.

Typically, a Qualifying Recognised Overseas Pension Scheme (QROPS) is beneficial for those living outside the UK. This structure helps protect individual income, and money invested therein can be passed on to family members without the 55% aforementioned tax being levied, thus protecting a family’s wealth.

A QROPS account can be set up for UK pension contributions that are exempted from tax. Such accounts must be fully compliant with HM Revenue & Customs (HMRC) requirements with regard to pension contributions, albeit with the appropriate terms and conditions applied for offshore accounts.

It is highly unusual for people to have sufficient retirement funds in their QROPS account alone, however.

There is another equally tax-efficient solution, again fully compliant with HMRC requirements, for pension contributions that are not tax-exempt: a Qualified Non-UK Pension Scheme.

This type of account affords people who still have UK domiciles the opportunity to build a pension with the main benefits of gross investment growth and the ability to transfer the pension fund to family members without incurring inheritance tax. The latter makes for very effective estate planning.

Clients can transfer a range of assets into this type of account, including rental property, regular and lump sum investment portfolios, and cash.

Due to the complex and convoluted nature of pensions and estate planning, we often commission independent actuaries to prepare a report and independent experts to help with estate planning.