A PENSION SCHEME
This is an arrangement by which an employer and, usually, an employee pay into a fund that is invested to provide the employee with a pension on retirement
An EURBS (European Union Retirement Benefits Scheme – International) pension scheme is a suitable tax efficient solution for people who have left or are leaving the EU country in which they have built up pension rights.
EURBS offer flexibility, tax efficiency, freedom of investment advantages as well as being able to pass the entire sum onto named beneficiaries upon death.
A SIPP (Self Invested Personal Pension – UK) is one of the most tax-efficient ways of saving for retirement. Traditional pensions typically limit investment choice to a shorter list of funds, however a SIPP lets you invest almost anywhere you like and choose your own investments.
A QROPS (Qualifying Recognised Overseas Pension Scheme – UK), is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC). A QROPS must have a beneficial owner and trustees, and it can receive transfers of UK Pension Benefits.
A QNUPS (Qualifying Non-UK Pension Scheme – UK) offers an excellent vehicle to top up the overall amount of assets and capital that needs to be set aside for a comfortable retirement, as many individuals do not have enough capital within their existing pension scheme to provide them with the level of income they will require in retirement. If you’re thinking of transferring your pension to a QNUPS, an actuary will help you establish the level of retirement benefits required to sustain your standard of living in retirement. Based on that information, a sensible funding level of contributions to the QNUPS can be settled with your financial adviser.
RECENT UK PENSION CHANGES – Q & A
- Who is affected by the changes?
The big change affects 4.5 million people with Defined Contribution (DC) schemes. With this type of scheme your monthly pension savings go into a big pot, which will eventually be used to buy an income for your retirement. You can now access that pot freely from the age of 55 (57 from 2028), taking out as much as you like, subject to tax.Some people with Defined Benefit (DB) pensions – which promise a particular annual income – will be able to swap them for DC schemes.
- How much tax will I have to pay?
You can take 25% of your pension pot as a tax-free lump sum. Or you can take out smaller amounts, of which the first 25% will be tax free on each occasion. But you will have to pay income tax on the amount you withdraw over and above the 25% tax-free allowance. If that amount, added to the rest of your income, exceeds £42,386 (2015-16), for example, you will pay tax at 40% or more. If the amount exceeds £100,000, you will begin to lose your personal allowance, resulting in an even higher tax charge.
- What tax will I have to pay if I buy a pension income?
If you buy an annuity (an income for life), or you take income drawdown (leaving your pension pot invested), you will only pay tax on the income. Anyone with total income below £10,600 in 2015-16 will not pay anything.
- How easy is it to pass on a pension to my dependants?
The new rules make it easier. If you die before the age of 75, the pension pot can be passed on tax free. If you die after 75, and your descendants want the whole pot as a lump sum, they will have to pay 45% tax, instead of 55% previously. However, the government is considering whether to reduce this to an individual’s income tax rate – known as the marginal rate – from April 2016. Those who draw down income from an inherited pot will, in any case, pay tax at their marginal rate.
- Are annuities still a good idea?
The pension changes mean that many people who would have bought an annuity, will not now do so. Income drawdown is a more flexible option for many. Nevertheless, for many people, annuities will still be the best option – or a mixture of an annuity and drawdown.You do not have to put all of your pension pot into an annuity. One of the benefits of the new pension laws is that you can take 25% of your pension pot tax free. You could take out the 25% and invest it in an ISA and then use the rest of the pension pot to buy an annuity.
This achieves three things:
- Firstly, it gives you some money with which to treat yourself after you retire.
- Secondly, it gives you the option to leave some money to your loved-ones.
- Thirdly, you can use the rest of the pot to buy an annuity and secure yourself an income for the rest of your life.
- Can I sell an annuity if I have already bought one?
In the Budget of March 2015, the chancellor said he would make this possible, and the government will now carry out a consultation. This could allow you to swap your annuity for cash, from April 2016.
However, no one knows how much demand there will be for second-hand annuities. Many suspect that those selling their annuities will find it hard to get a good price.
- The Difference between a Defined Benefit Scheme and a Defined Contribution Scheme
A defined benefit plan, most often known as a pension, is a retirement account for which your employer ponies up all the money and promises you a set payout when you retire.A defined contribution plan, requires you to put in your own money.
Because defined benefit plans are more costly for employers than defined contribution plans, most of them have scaled back dramatically or eliminated these plans altogether in recent years. If you still have a defined benefit plan at your company, consider yourself lucky.Another key difference: If you leave the company before retirement age, you may take the contents of your cash-balance plan as a lump sum and roll it into an IRA. A traditional pension isn’t portable.Some employers offer both defined benefit plans and defined contribution plans. If yours does, you should definitely participate in the defined contribution plan as well. That’s because more often than not, the amount of your defined benefit plan won’t be enough to allow you to live comfortably in retirement.
- What if I am in a Defined Benefit (DB) scheme – can I move to a Defined Contribution (DC) scheme?
In theory you can – if your employer allows it. Transferring to a DC scheme means you could get your money out more easily, and pass it on to descendants. But again, you may not get the best value.
DB schemes usually offer inflation proofing, and the ability to pass some of the income on to a spouse.
They also have a particular advantage if you are getting close to the maximum amount you are allowed to have in a pension pot.
- What are the new rules on how much you can save in a pension?
From 6 April 2016, the maximum you can have in a pension pot will be £1m, reduced from £1.25m. This figure will rise with inflation from April 2018. The government says the change will only affect wealthy people.
But a 60 year-old spending all their £1m pension pot on an inflation-linked annuity could – according to current annuity rates – expect a maximum annual income of around £27,000. You can have a larger pension pot if you wish, but you will pay 55% tax on any withdrawals.However, anyone in a DB scheme will be treated more generously.
Such schemes have a notional capital value, calculated by multiplying the annual income by 20. So if the scheme pays an income of £10,000 a year, the notional value of the pension pot is £200,000.
Given that the maximum pot will now be £1m, members of DB schemes can therefore expect annual incomes of up to £50,000. The annual allowance for pensions savings remains at £40,000.
- Is the state pension changing?From 6 April 2016. The additional state pension and part of pension credit is being abolished, to be replaced with a single-tier state pension. The rate will rise from £113 a week to around £155, but the precise amount will be set towards the end of 2015.
However, most people will not qualify for the full pension, as their schemes were contracted out of the second state pension, and they paid lower National Insurance (NI) contributions as a result. To qualify for the full pension, you will now need 35 years of NI contributions, instead of 30 previously.