In March 2014, the then Chancellor of the Exchequer, George Osborne, announced a radical reform of the pensions system to give people greater flexibility to access their pension savings. The new pension freedoms took full effect from 6 April 2015 and have given retirees a whole host of new options.
There is no longer a compulsory requirement to purchase an annuity (a guaranteed income for life for a fixed number of years) when you retire. The introduction of pension freedoms brought about fundamental changes to the way we can access our pension savings.
Pension freedom rules mean those aged over 55 no longer have to purchase an annuity to access their pension income but can instead enter drawdown or take a cash amount.
There is now much greater flexibility around how you take your benefits from Money Purchase Pension (Defined Contribution) schemes, which includes Self- Invested Personal Pensions (SIPPs) or Qualifying Recognised Overseas Pensions (QROPs).
This was a genius move by the UK government. It gave them increased popularity and an initial hike in taxes collected from the member’s income tax and the VAT collected on whatever the person spent the money on. The famously quoted pensions minister at the time Steve Webb said: “If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.”
Even more interesting for expatriates is that some can withdraw all their money in one go and pay tax at a rate of zero, meaning they alleviate their entire pension from future income tax. Several variables include a persons age, country of residence, pension jurisdiction, and type plus temporary non-residence rules. Specialist advice should be taken.
Since the rules governing how pensions can be taken have been dramatically relaxed, more people are using pension freedoms to access their retirement savings. Still, the amount they are individually withdrawing has continued to fall, according to the latest data from HM Revenue & Customs (HMRC).
Pension freedoms have given retirees considerable flexibility over how they draw an income or withdraw lump sums from their accumulated retirement savings. There is no doubt the pension freedoms have been hugely popular.
1. You need to have been out of the UK or intend to stay outside the UK for five complete tax years
2. Your pension needs to have Flexi access (SIPP or QROP)
3. You have to be over 55
4. The country you live in must have a 0% income tax on foreign pensions
5. The country your pension is located in must have a tax treaty with the country you are resident in that
passes taxes rights to your country of residence.
The main two pension jurisdictions that make a 100% tax-free withdrawal possible are the UK (SIPP) and
Malta (QROPS) and the countries that this is possible with are the UAE, Qatar and Saudi Arabia and Malaysia
(SIPP only). Due to all the tax relief HMRC give to UK pensions; generally, the UK and Malta’s tax treaties only
pass taxing rights to counties with income tax. So if you are over 55, living in the GCC and have any pensions,
it would be wise to explore your options.
The way you draw an income from your pension is likely to be primarily determined by your retirement
financial situation. For example, will you still be paying off your mortgage, or do you have any other
significant debts? What other income sources, aside from the State Pension, will you have at your disposal?
While an annuity can offer you the security of a guaranteed regular income, a drawdown plan gives you
the chance to grow your pension and overall wealth during retirement. The latter route is likely to suit those
with a higher risk appetite, as any significant market swings could potentially cause severe damage to your
pension savings.
The pension flexibilities may have given retirees more options. Still, they’re also very complicated, and
it’s essential to think carefully before making any choices that you can’t undo in the future. Withdrawing
unsustainable sums from your pensions could also dramatically increase the risk of you running out of
money in your retirement.
Want to find out more? Request an introduction to a finance specialist who can help you with your pension questions.
