The UK government took everyone by surprise in March by announcing a series of radical changes to pensions. The measures are the most significant pension reform since 1921, and give retirees much more freedom over their pension pot.
For most people, their pension funds are a very significant part of their wealth. Retirement planning is an essential component of your new life here in Portugal.
Chancellor George Osborne explained that he wants “people to be trusted to make the right decisions about their future”, and retirees will appreciate having more control over their pension funds. However you need to be armed with all the facts, understand how all the options affect you, and review what you have to enable you to make the best overall decision for your personal situation. The reforms provide more options and opportunities, making specialist advice more important than ever before.
Some reforms have already been introduced for Defined Contribution Scheme members, while others will start next April.
With effect from 27th March 2014, the capped drawdown limit increased from 120% to 150% of an equivalent annuity. You can take a higher income from your pension fund, generally as at the date of your next annual review, but you also need to consider how this could affect your pension pot in later years.
Another key change was the reduction in the minimum income requirement for flexible drawdown, from £20,000 to £12,000.
Flexible drawdown allows you to take as much of your pension fund as cash as you wish, and this option is now available to more people.
It is important to consider the local tax implications before you make any decisions. Here in Portugal, with the local tax rules, flexible drawdown can be an attractive option. However you also need to be aware that when you withdraw funds from your pension scheme(s) you lose the inheritance tax protection that it offers; the capital will form part of your estate for inheritance tax purposes.
The size of a ‘small stranded pot’ that can be taken as a lump sum regardless of total pension wealth increased from £2,000 to £10,000 for those age 60 and over, and three funds can now be taken in this way. In addition, the total pension wealth people can have before they are no longer entitled to receive lump sums under trivial commutation rules increased from £18,000 to £30,000.
The government also launched a consultation on more pension reforms. It intends, following amended legislation, to remove all remaining restrictions on how retirees have access to their pension pots – you will have complete freedom to draw down as much or as little of your pot as you wish, any time you like.
The key change here is that the tax rate on cash taken out of defined contribution pension funds on retirement will be reduced from the current prohibitive 55% rate. If this goes ahead, the withdrawal (after the 25% tax free lump sum) would instead be taxed at the individual’s marginal rate of income tax. Remember, this is under UK tax rules, so you also need to look at local taxation.
These changes will not apply to Defined Benefit Scheme members, but a consultation has been launched regarding transferring out of public and private Defined Benefit Schemes into Defined Contributions Schemes.
These proposed conditions have wide implications for retirees. Again, you should consider the tax implications in Portugal, as well as the fact that the cash would become exposed to inheritance tax.
For larger funds, there is a need for sound financial planning and advice. The taxation, if structured correctly, could allow you to achieve a number of financial aims that may otherwise not have been possible. In some cases it may be beneficial to suffer tax on the funds to enable you to invest in something that suits you better, but this would have to be very carefully considered. You need expert advice to make sure you do what will work best for you in both the short and long-term.
Much can happen between now and April 2015. The proposed rules could change under consultation. A new government could well revise the rules - the General Election is currently scheduled for May but could happen before.
Specialist advice is therefore important for you to keep up-to-date on all the changes, as well as to establish the most suitable options for your personal situation.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
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