New tax laws in UK on pensions

Question: I am a British expatriate living in Dubai and I understand some new tax laws on pensions are coming into force in the UK. How do I go about transferring my frozen pensions offshore and what are the advantages and disadvantages of such a move?

Answer: Many of the new UK tax laws on pensions are expected to come into force on April 6, making some significant changes to past legislation.

These include removal of the requirement to purchase an annuity, a new tax charge of 55 per cent levied on lump sum death benefits where pension benefits have previously been taken (otherwise funds remain tax free on death up to age 75 and taxable after age 75), a new minimum pension income requirement initially set at £20,000 per annum before access can be gained to taxable flexible pensions draw down and finally reductions in lifetime allowances from the present £1.8 million to £1.5 million from April 2012 alongside significant reductions in annual allowances.

If you plan to live and retire outside the UK you may want to look at consolidating funds from UK frozen or preserved pensions into a single scheme, reducing your income tax liability, securing higher tax-free lump sums, looking at ways to pass more of your existing retirement fund to your family when you die, and possibly increasing your currency, investment and payment flexibility. If so then it may be appropriate to consider transferring your UK pension(s) to a Qualifying Recognised Overseas Pension Schemes (Qrops).

Expert advice

These schemes are operated in well known fiscally neutral offshore locations where high regulatory standards exist. The schemes have to be registered with Her Majesty's Revenue and Customs (HMRC).

Whilst not all frozen or preserved pensions should be transferred, most pensions are easily transferable. Expert advice is therefore essential, for example in relation to final salary schemes or plans with guaranteed annuity rates or guaranteed minimum pensions. Ideally this should be in the form of a no obligation pensions benefits review which your independent financial adviser can arrange.

When a UK pension scheme or plan is to be moved to a Qrops your UK provider will notify HMRC and the Qrops provider must report any pension payments made to you during the first five complete tax years following your departure from the UK.

Like any pension plan with a Qrops scheme you can nominate specific beneficiaries to receive benefits in the event of your death.

These payments can be free of taxes. Pension payment flexibility, a choice of currencies and a wide range of international investment options may well be important to you if you are not returning to the UK. Qrops arrangements can accommodate these requirements and annual and lifetime limits are no longer relevant.

When it comes to drawing a lump sum from your Qrops this is possible if you are over 55 and did not receive a lump sum before you left the UK. You may take an increased sum from your Qrops, which in Guernsey, for example, is 30 percent of your UK transferred fund.

Budget deficits

Even though some of the proposed UK changes will be welcomed it is hard to escape the fact that UK tax rates are increasing and pension tax relief is reducing as part of a continuing drive to address large budget deficits. In light of this it would be a good time to work with an independent financial adviser to ensure that your pension plans will still meet your specific circumstances.

The writer is Chartered Insurer, Commercial Director, Nexus Group. Opinions expressed in the column are the writer's own and do not reflect those of Gulf News. if you have any questions, please email it to advice@gulfnews.com