Private Pension From The Uk

[astral]

I was talking to a BA pilot yesterday and he understands that when he retires next year he can

move out of the UK and declare himself Non Resident and Not Ordinarily Resident to the UK tax man

and claim tax relief on his BA pension for the time his is out of the country.

This will reduce his tax bill to 5%.

This does not sound right to me.

Does any one else have any experience??

Thanks

[astral]

Interesting that no-one else has heard of this approach to reducing tax payments.

[Nibor1945]

I was talking to a BA pilot yesterday and he understands that when he retires next year he can

move out of the UK and declare himself Non Resident and Not Ordinarily Resident to the UK tax man

and claim tax relief on his BA pension for the time his is out of the country.

This will reduce his tax bill to 5%.

This does not sound right to me.

Does any one else have any experience??

Thanks

Hi.

I have been registered as Not ordinarily Resident for tax puposes in the UK, however this appears to apply to pension/income not originating from the UK. My Service pension and 2 smaller pensions are still taxed in the UK.

[jbaldwin]

My understanding is that this is not correct.

The key point is that there are different rules for earned income (salaries etc) and unearned income (eg investment income) and that pension income, if the contributions were made from a UK salary, are treated as earned income.

Earned income from the UK is subject to UK tax whether are not you are resident and ordinarally resident.

[endure]

Any income earned in the Uk (above your tax allowance) is taxable in the UK.

[GuestHouse]

Any income earned in the UK (above your tax allowance) is taxable in the UK.

This needs some clarification: Any income earned in the UK (above your tax allowance) is subject to taxation under the taxation laws in the UK.

There are some means of obtaining a non taxed income (Tax free savings and investments).

One method of reducing tax on a UK based private/company pension is therefore to take advantage of the 'Tax free lump sum' allowable under the tax laws and invest that tax free lump sum in a tax free investment.

This however does need some careful consideration as it reduces your pension fund and that naturally reduces your pension income. So anyone considering this option should speak to a financial advisor before doing so.

There are two particular risks I see.

Firstly the money being spent on a new car or some such liability (I suspect that many a Fortuna purchased this way)

Secondly reducing your pension income is not a good idea if you have a wife who is many years younger than yourself (common in Thailand) - . This becomes critical if you have or are likely to have young children after and during your retirement.

Clearly if you have invested your lump sum in a PEP or Government Tax Free Savings you will recover income later in retirement, but this needs to be measured against your retirement needs.

Oh and here is my prediction.

Tax free lump sums from pensions are not going to be around for long.

At some time in the not too distant future one government or another is going to take them away.

The preliminary attack will come as a statement of ‘public outcry’ that fat cats are getting tax free money from their pensions. Once the power of public spite and envy has been unleashed the tax free lump sum option shall be removed.

Oh and don’t just blame the labor party for this, it was first floated as an idea by John Major.

[Mobi]

Any income earned in the UK (above your tax allowance) is taxable in the UK.

This needs some clarification: Any income earned in the UK (above your tax allowance) is subject to taxation under the taxation laws in the UK.

There are some means of obtaining a non taxed income (Tax free savings and investments).

One method of reducing tax on a UK based private/company pension is therefore to take advantage of the 'Tax free lump sum' allowable under the tax laws and invest that tax free lump sum in a tax free investment.

This however does need some careful consideration as it reduces your pension fund and that naturally reduces your pension income. So anyone considering this option should speak to a financial advisor before doing so.

There are two particular risks I see.

Firstly the money being spent on a new car or some such liability (I suspect that many a Fortuna purchased this way)

Secondly reducing your pension income is not a good idea if you have a wife who is many years younger than yourself (common in Thailand) - . This becomes critical if you have or are likely to have young children after and during your retirement.

Clearly if you have invested your lump sum in a PEP or Government Tax Free Savings you will recover income later in retirement, but this needs to be measured against your retirement needs.

Oh and here is my prediction.

Tax free lump sums from pensions are not going to be around for long.

At some time in the not too distant future one government or another is going to take them away.

The preliminary attack will come as a statement of ‘public outcry’ that fat cats are getting tax free money from their pensions. Once the power of public spite and envy has been unleashed the tax free lump sum option shall be removed.

Oh and don’t just blame the labor party for this, it was first floated as an idea by John Major.

Guesthouse, you are right on the nail.

I had a huge argument with someone recently who insisted that his UK pension was not taxable, once he became non - resident. He subsequently admitted that he had got it wrong.

Any income from my Uk pension is taxable, but I have been enjoying tax free income from offshore investments for a number of years as I am non- resident. I even got the inland revenue to confirm this in writing, as I didn't want any problems further down the line.

The lump sum issue is interesting. In my case I have not yet drawn any money from my UK pension scheme - which is a draw down arrangement - and until I do, the scheme has not been started and I am able to leave my 25% in there, growing all the time. The dilemma is that the money in the pension scheme can never be realised except as income (except the 25%), but my offshore investments are mine to do what I wish. As long as I take income from my offshsore investments, I have no tax liability, but against that I am depleting (or at least stunting the growth) of assets that are mine to spend. If I take an income from the pension scheme, I will pay tax, but can grow my offshore realisable asses at a faster rate. So the dilemma is, do I pay tax and have more realisable assets later, or do I take a tax free income now, and let my pension pot grow, including the 25% tax free lump sum?

Should be an obvious answer to this, but I can't see it. Anyone?

[suiging]

I would think the answer would have a lot to do with family circumstance.

"There are no pockets in your shroud" , my old Gran would say and she spent and enjoyed every penny to the full. Protecting forever a lump sum will be great for the old rellies, but will they remember to keep the flowers fresh ??

[Mobi]

I would think the answer would have a lot to do with family circumstance.

"There are no pockets in your shroud" , my old Gran would say and she spent and enjoyed every penny to the full. Protecting forever a lump sum will be great for the old rellies, but will they remember to keep the flowers fresh ??

There's no question of protecting it forever - it's just a question of getting the timing right. Whatever happens when I die, my family will still get a good income from the pension scheme so that's not really a factor.

[rak sa_ngop]

From my own personal experiences I have found that a lot of the offshore/international funds that I have invested in have performed like soi dogs, whereas the UK based equity funds which debit non-recoverable UK income tax have done rather well.

I have no probs about paying UK tax on UK based investments as long as I can keep my liquid funds offshore in a tax free environment.

[GuestHouse]

Mobi, my view of pensions and retirement is as follows, I admit it almost certainly not the same view others may have.

'Secure retirement income' is to my way of thinking, perhaps the single most important financial asset we can hold.

I base this on the view that up and until we retire we are able to earn an income and recover any losses in investments or spending. Once we retire (or importantly reach the position where we no longer can earn enough to build capital) we are wholly dependent on the capital we have built up during our working years.

The important thing to note here is that there is no single cut off, rather we most of us slide into lower earning power. Either by age, because we (in my mind) sensibly reduce financial risks, or health, time away from the work market etc reduces our income capacity.

Pensions should therefore take into account this inability to replace capital. We should be looking for financial security in pensions. The nearer to retirement we get, the more financial security we need.

Unless we are very fortunate in having secure pension savings that completely cover our needs (now and into the future) then we should not be taking risks with savings. And if we have secure pension income, why take more risks?

There is this other issue of expat retirees starting young families, and how to provide for them in the future. Most UK pension schemes will provide a secure and guaranteed income for dependents of pension holders. So if you are retired and have a young wife with a young child(ren) then a pension offers very good long term security for your family.

In the past I have mentioned the issues surrounding ensuring that the dependents of an expat have a secure income after the death of the expat. This is particularly difficult where liquidate able savings may be frittered away. Again pensions offer a real benefit in protecting the interests of children and spouses after our death.

I know that idea of a life time's pension savings disappearing if you die soon after retirement is a bit galling. But it generally does not apply if you have dependents (especially young children) and don't ever forget the plus - Secure income, almost certainly with annual Cost of Living Increases.

Some things to consider before taking a lump sum out of pension savings:

Have you any dependents (particularly Children or a very much younger wife)? This greatly increases the time for which the pension shall be paid.

What is your own life expectancy? Judge that against your parents and consider the impact of your life style.

How is inflation impacting you now and how might that go in the future (for the full period of your expected pension pay period - Children to 18 years old, wife to her death)?

Does reducing your pension pay out unduly impact your flexibility if things don't work out in Thailand (are you burning bridges)?

Also consider this.

In the UK there are two general forms of pension.

Defined Benefit (Usually a company pension that guarantees a minimum % of your final salary)

Flexible Benefit (Usually a private pension that provides a pension determined by the performance of the stock market and other investments).

Defined benefit schemes are the cream of the crop. They offer superb long term stability, and under recent changes in the law are very very well protected. I personally believe that taking money out of a defined benefit scheme would be very unwise, especially if you have any dependents who will rely on your pension after your death.

Flexible benefit schemes are a bit more of a gamble, and you may decide you can do better by moving some of the capital onto the stock market.

In the UK what happens is on the day you take your flexible benefit pension you will have to buy a very secure annuity that has a relatively low, but again secure % income.

You just need to decide can you take the risk of leaving some of your pension fund money to the stock market?

If the income from the residue is insufficient to remain retired (in consideration of dependents etc). Then I suggest you cannot afford to take the risk.

If you haven't got enough long term income without taking this stock market risk, then I suggest the truth is obvious, your capital is insufficient to retire without taking a risk you may not be able to afford.

I would add, I've read and heard a lot about people using software 'low sells' to limit their risk exposure. But these only work when someone is willing to buy. They are a mask covering the truth that as we get older we should be reducing our risk and moving to secure savings and income.

That is a piece of advice that is consistently put out by professional wealth managers. You can of course get different advice from people who claim to be making a huge amount of money in retirement. I usually avoid such claims on the basis that I follow my accountant’s advice on financial matters and my doctor’s advice on reducing the ‘pinches of salt’ in my diet.

[Mobi]

In the UK what happens is on the day you take your flexible benefit pension you will have to buy a very secure annuity that has a relatively low, but again secure % income.

Thank you for your long and detailed reply, much of which I agree with.

Maybe I didn't make myself clear, but for the record, whether or not I take the 25% lump sum now or later has no bearing on the considerable income that will be available to my heirs, whether I die tomorrow, or in 30 years time, and after allowing for inflation. I raised the question purely to see if there are any aspects I had not considered when trying to decide the best way to go - tax wise, and asset wise, with regard to where I take my income for now, and when do I transfer the 25% lump sum. Either way, there is more than enough to see me and my heirs through.

I think you are a little out of date on the types of pension scheme available. For some time now, you can transfer your private pension fund into a 'draw down' arrangement, which is effectively an investment fund that you can control yourself, through approved investment managers and investing in approved investments. These schemes are only recommended for those with a very large pension pot, and are an alternative to the annuity route. I do not have to take any income from this fund until I am 75 years old, and when I do, I need only draw only as much as I want, leaving the remainder to grow until I need it. , and the fund does not die with me but passes to my heirs for them to draw an income from. Such schemes have been available for a number of years now, and recent legislation have made them even more flexible and attractive to those who wish to have some measure of control over their own money. Not for the faint hearted, but managed well, but investing in low to medium risks spread funds should produce returns exceeding 10% per annum.

BTW my offshore funds have exceeded 12% return over the past 4 years.

[astral]

BTW my offshore funds have exceeded 12% return over the past 4 years.

I hope that 12% is per annum??

[Mobi]

yes, Astral, I did mean 12% p.a. Long may it continue.

I must correct something I wrote in my previous post.

It has just come to my attention that the loophole I was extolling was closed by the Chancellor last December, and if I choose not to convert my 'draw down' arrangement (now called an 'unsecured pension') to an annuity when I am 75, and choose instead to pass it on to my heirs, they have to fork out penal 82 % in ineritance tax, which effectively removes this as a viable option.

However, under the new rules, I can draw out almost the total amount of cash that was originally in the unsecured scheme over the next 15 years as 'income' (paying income tax at the going rates), and then, by careful 'gifting', can pass it on tax free to my heirs, or I can add it to my offshore funds.

Edited April 25, 2007 by Mobi D'Ark