Proposed Changes To Uk Private Pensions

[wordchild]

there are some quite significant changes to UK private pension rules being announced today. The press reports suggest they will come into effect from april next year. eg potential for 100% drawdown of the fund if you can demonstrate sufficient income from other sources.( this would obviously be subject to tax at your full marginal rate). I cannot at this stage find any info as to whether or not this greater flexibility would be extended to QROPS could be some interesting implications here.

[ESB7]

100% drawdown, now that would be something, if the De Minimis amount is increased again substantially that would cover many that have a PP. Lifetime contributions are supposed to be decreased to 1.5 million but that probably wont affect many here as they will already have vested their pension...any government pensions are set to increase by CPI rather than RPI next year, that can work both ways but this September CPI was a lesser amount....it will definatly be interesting to see the full report and the implications that are involved, more than likely pensioners with a significant fund value will be worse off.

[SantiSuk]

But if you have other sources of income sufficient to live from then there are probably limited circumstances in which it would make sense to take the money out of the partly tax-free environment of a qualifying pension and put it into a tax payable environment. Capital gains on the underlying investments are not chargeable to CGT within the pension and income is less heavily taxed for higher rate taxpayers (I think but I'm not 100% on the latter - I know Brown screwed this area down). Those limited circumstances would include having a great business venture idea that needs the money or some family crisis.

It may well make sense to transfer money from a pension every year to maximise investments in your ISA however - particularly the cash ISA element (since everyone needs some cash reserves you should try to keep those deposits in a tax-free wrapper which an ISA provides).

Better in my view to concentrate on making sure your pension is with funds that are performing well and not being ripped off for fees by the manager. Too many people sit with a poorly performing expensive fund for decades on end with one provider and then complain when the pot is less than they expected or worse - Equitable. Too many people spend more time thinking about their next car than their pension.

Wait for better tax times ahead (maybe) rather than pulling it out now when tax rates are high.

Edited December 10, 2010 by SantiSuk

[chiang mai]

It's important to note that the 100% draw down only applies as long as you have £20,000 per year in addition to your pension so this rule is only likely to apply to a few people. Also, the tax rate on the balance of the fund at time of death will be 55%, regardless of age.

[wordchild]

my take is that this is quite a smart move by the UK govt, not just because it gives people more flexibility and should help ensure better value for those who still purchase annuities. I also think many of those with large 2mil+ pension pots will be tempted to cash them in (having taken out the 25% tax free sum and purchased an annuity to cover the £20000 minimum income requirement) . There are quite alot of people in the UK in this position and it could generate a bit of a tax windfall for the gov in bringing forward some lumpy taxable income.I see from the treasury website they expect it to have a modest impact on tax revenues but i think that maybe an underestimate.

I think one of the more interesting implications of this is how these new rules will affect those with QROPS. One would think that to be consistant HMRC should now allow a significant easing in the restrictions (in terms of remaining compliant) around the cashing out of these funds as well .

Edited December 10, 2010 by wordchild

[chiang mai]

Yes, I also agree it's a very effective move in order to raise revenue. But it's hard to imagine what steps government might take to change QROPS, especially given that QROPS is a relatively new phenomena, QROPS already removes a tax liability within five years and it's difficult for me to imagine that might be improved on since The Revenue has nothing to gain from doing so - or maybe The Revenue will decide to have a "be nice to ex-pats" campaign in advance of denying them any State Pension at all, if they decide to live overseas!