The biggest shake-up in UK pensions legislation for over 50 years will occur in April, thanks to new ‘liberation’ measures introduced by the government, says Robert Brearley.
Historically, the key tenet of UK pensions has always been that they must be used to provide an ‘income for life’.
However, from next April, individuals over the age of 55 will gain unrestricted access to pension fund savings.
There is still the option to take a lump sum of 25% of the fund. For UK residents this is tax-free, but for French residents UK pension lump sums have been subject to French tax following legislation enacted in July 2011.
There are a number of taxation options available but the most common is taxation at a fixed rate of 7.5%, after deducting an allowance of 10% of the lump sum.
The remaining 75% of the pension fund can still be used to buy an annuity or to provide income by drawing down on the fund.
The biggest change under the new UK rules is that the previous limits applying to drawdown arrangements are removed, and it will even be possible to “encash” the entire fund through a single payment. All such payments will be classed as income, even if the entire remaining fund is taken, and, for UK residents, will be subject to UK income tax.
The tax position for French residents taking such payments needs to be considered carefully.
Robert Brealey, partner of Abbotstone Financial Solutions, and formerly pensions consultant with specialist adviser Siddalls, explains, “It might be tempting for a French resident with a residual pension fund in the UK to consider arranging a large payment, or indeed withdrawing the entire remaining fund, with a view to declaring it as a ‘pension lump sum’, on his or her French tax return, subject to the fixed 7.5% tax rate.
However, until confirmation is provided by the French tax authorities on the treatment of such payments, individuals should be wary of making large cash withdrawals. The new UK pension rules make it clear that any payments out of the fund, after the initial 25% lump sum, are classed as income. HMRC would confirm this position if clarification of the payment is sought by the French tax office under the UK/France Double Tax Treaty exchange of information provisions”.
Pensions also offer other advantages which would be lost on encashment. In addition to tax-free growth, the new rules will also remove the 55% tax charge that has previously applied to drawdown funds in payment on the death of the pension holder.
There are other considerations but with careful planning it should be possible to utilise pension funds as a tax-efficient way of passing more money to beneficiaries.
It is clear that the new UK pension rules will offer further options and opportunities to French residents with UK pension funds, but careful planning will be needed to obtain the optimum mix of pension benefits and tax-efficiency.