The biggest reforms to UK pensions in almost a century are underway. These reforms will change drastically the way savers can access their pensions.

The pension reform was first announced in the UK March Budget. Some initial changes came into effect immediately, but the main reform will start in April. The UK government launched a consultation on its proposed changes and released its response to the consultation, ‘Freedom and Choice in Pensions’ in July.

Pension freedom

The UK government believes individuals should be trusted to make their own decisions with their pension savings. From April, individuals aged over 55 with defined contribution schemes will be able to access them as they wish – there will be no restrictions on how much you can withdraw; you can even take the whole amount. For UK taxpayers, the first 25 per cent will be tax-free and the remainder at the individual’s marginal UK tax rate.

It is important for expatriates to consider the local tax implications in their country of residence. With appropriate and effective tax planning in Malta, funds could be withdrawn from a UK pension over and above the 25 per cent tax-free lump sum, at a tax rate as low as 15 per cent (or even lower if a pension restructuring has taken place).

Transfers out of private sector defined benefits pension schemes will still be allowed, up to the members’ normal scheme retirement date as opposed to within 12 months.

Further consultation will be carried out to determine the viability of partial transfers. Transfers out of unfunded public sector defined benefit schemes will not be allowed.

It will be a statutory requirement for such transfers to have been advised by a professional financial adviser who is independent of the scheme and authorised by the UK Financial Conduct Authority (FCA).

Other changes

Currently, a 55 per cent death benefit tax charge is levied on pensions that remain invested when the holder dies. This charge will be cut, with a new rate to be announced in the autumn statement.

Legislation will be introduced to enable product providers to introduce more flexible annuities.

The minimum pension age will increase from 55 to 57 in 2018 and thereafter it will be 10 years below the State pension age. This will not apply to certain public sector schemes, such as the armed forces, police and firefighters.

The biggest reforms to UK pensions in almost a century will change drastically the way savers can access their pensions

For those aged over 55, after April and still in employment, annual pension tax relief will be limited to £10,000 for further contributions where benefits in a defined contribution scheme have been drawn.

A free ‘Guidance Guarantee’ will be provided to members on the features and considerations of the new pension choices. This will be provided by The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).

The UK government recognises that the changes to the pension tax rules will have implications for the rules relating to Qualifying Recognised Overseas Pension Schemes (QROPS). It will consider these implications further to ensure that the rules relating to QROPS are appropriate when the new system comes into force.

There was no news on the suggested removal of, or change to, the lifetime allowance. These reforms follow on from the transitional changes that were implemented from March 27 this year:

The minimum income requirement for accessing flexible drawdown reduced from £20,000 to £12,000.

The capped drawdown limit increased from 120 per cent to 150 per cent of equivalent annuity.

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 small pension pots lump sum limit increased from £2,000 to £10,000, and the number of pots that can be taken as a lump sum increased to three.

These pension reforms are very welcome, but it is essential to understand how they can be applied to your circumstances to maximise the benefits they offer. The tax element, both in the UK and Malta, plays an important part. Specialist advice is important to make sure you get it right.

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.

To keep in touch with the latest developments in the offshore world, check out the latest news on www.blevinsfranks.com.

The author is a private client manager at Blevins Franks Financial Management Ltd.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.