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    • New pension changes to affect British expats

      On December 9, 2010, the UK Government announced more changes to UK pension legislation, the most significant of which was the long-awaited announcement that from April 6, 2011, there will no longer be a requirement to purchase an annuity at age 75.


      This change to legislation provides individuals with far greater flexibility with how they can plan their income and indeed overall wealth in retirement.


      The changes announced by the UK Government do have implications for British expats or individuals of other nationalities living in the region that have accumulated pension benefits in the UK and therefore it is important to review UK pension benefits in light of these changes to UK pension legislation.


      Age 75 - still a pivotal age
      Although the need to annuitise by the age of 75 has been removed, 75 will remain a pivotal year for many of the changes as this will still be the age that different rules will be applied for example the treatment of death benefits, as detailed later.


      Income drawdown returns
      Prior to the last set of UK Pension Reforms in 2006, the alternative to annuity purchase was known as "income drawdown", this was renamed "Unsecured Pension" in April 2006, and in a clarification of terminology, it has now reverted to Income Drawdown!!


      There are two key changes to Income drawdown to be introduced from April 2011 which are: the maximum level of income that you can draw from your pension fund will be reduced and the period for re-assessing the maximum income that can be drawn will revert back to every three years (currently every five years) for those drawing pension benefits under 75 but will remain annually for those over 75.

      Introduction of minimum income requirement
      A significant change announced by the UK Government is the introduction of the term "Minimum Income Requirement" (MIR). This essentially means that for individuals who can prove they have sufficient income elsewhere, they will not be restricted to the maximum income drawdown limits outlined above and they will be able to draw an unlimited amount from their pension fund subject to income tax at their marginal rate. This will be known as "flexible drawdown" and could potentially provide far greater flexibility for many.
      The minimum income requirement is to be set initially at 20,000 per annum and it has been confirmed that income received from state pensions, annuities and final salary pension schemes will count towards MIR, therefore, British expats living in the region who have final salary pension benefits may be able to make use of the flexible drawdown rules in the future.


      Inheritance tax and pensions
      Amongst the many changes announced on December 9, it was confirmed that death benefits payable from pensions will not form part of an individual's estate for UK inheritance tax purposes. This is not a change from the current legislation for those under the age of 75. However, it is a significant change for those who are 75 or older, under current legislation; for an individual taking benefits through alternatively secured pension the lump sum payable on death would fall part of an individual's estate for Inheritance Tax, making the effective tax rate of up to 82 per cent.
      However, there is a sting in the tail as far as taxation of pension death benefits is concerned. Whilst they will not be subject to inheritance tax, upon death after taking pension benefits (i.e. when drawing benefits in income drawdown) before age 75 and irrespective of whether drawing benefits or not after age 75, it will be possible for a lump sum to be paid to beneficiaries but this will be subject to tax at 55 per cent.
      UK Inheritance Tax is an important consideration for any individual who is of British domicile as the tax is chargeable on death on worldwide assets irrespective of where you are residing at the date of death. Therefore, it is important that even though you are not currently residing in the UK you regularly review your Inheritance Tax situation.


      Contributions to a UK pension
      In addition, to how pension benefits can be taken, there are also changes to how much you can pay into a UK pension and benefit from tax relief. If you are not earning income that is subject to UK income tax then these changes are not relevant, but it worth bearing in mind that British expats who have been out of the UK for less than five full tax years, it is possible to pay a contribution to an existing UK pension and benefit from tax relief on that contribution even though you are not currently paying UK income tax.
      Under current legislation, it is possible to pay a contribution of 2,880 and receive tax relief of 720 to make the total gross contribution of 3,600; example of how you can get something back from the UK Government even thought you are not paying UK income tax.
      Qrops
      Within the region there is significant promotion of Qualifying Recognised Overseas Pension Schemes (Qrops) to British expats, however, this form of pension arrangement does tend to only be suitable for the minority of British expats living in the region, in particular, those who have no intention of returning to the UK for retirement.
      If you anticipate that you will retire to the UK or are not yet clear on your plans, then it is unlikely that a Qrops will be suitable for your requirements and you could incur additional unnecessary costs in the meantime.
      However, there can be significant benefits gained by transferring to a Qrops if you have no intention of retiring to the UK.
      Implications for British expats
      Whilst living outside of the UK, it is easy to not keep track of all the changes in legislation that take place in your home country, but it is important to stay on top of any changes, particularly in relation to retirement planning as at some point in the future, when you stop working you will need an income to be able to maintain your lifestyle.
      The changes to pensions legislation in the UK from April 2011 are significant and do provide far greater flexibility as to how income can be drawn from UK pensions. With the changing pension landscape in the UK, now is a good time to review your own retirement planning situation to ensure that you are making the most of the options available to you and importantly ensure that you are on course for living the life you desire in retirement.

      Benefits: Long-awaited announcement

      - Requirement to purchase an annuity is to be abolished in full from April 2011
      - A tax charge of 55 per cent will apply on death for crystallised pension funds
      - There will be no tax charge on death for uncrystallised funds until age 75, where it becomes 55 per cent
      - Minimum Income Requirement will be introduced and set at 20,000 per annum initially
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