It is welcome news that under new UK legislation we are no longer obliged to purchase an annuity upon retirement. It is important therefore for expats to consider alternative ways to access their UK pensions?
Rather than buy an annuity, individuals can opt for either a ‘capped drawdown’ or ‘flexible drawdown’ of their pension. They may decide to split their pension fund between buying an annuity and entering drawdown, or even opt to purchase an annuity at a later date. The key issue is that there is now a lot more flexibility in the system in terms of how one can draw income in retirement.
Capped Drawdown Facility
Pension fund savings can be invested in an income drawdown plan. A pension commencement lump sum of 25% can be taken tax free from the fund; thereafter a regular income can be withdrawn. The maximum income that can be withdrawn is based on the pension fund value and calculated in accordance with Government Actuary’s Department (GAD) tables. This so called GAD factor determines the level of income that can be drawn for each £1000 of a member’s pension fund. The figure is based on age, gender and current UK government bond yields. The maximum income that can be accessed via the pension drawdown facility has now been increased from 120% to 150% of basic rates.
Calculation of the maximum income that can be taken from a Drawdown Pension Plan
Example: 60 year old male with a pension fund value of £100,000
Tax-Free Lump Sum: £25,000.00
Residual Pension Fund Value: £75,000.00
Maximum Drawdown Pension per annum: £5,962.50
[Based on standard 150% GAD income of £53.00 per £1,000 of pension fund per annum, and a Gilt Index Yield figure of 3%]
Flexible Drawdown Facility
The change in the rules on ‘flexible drawdown’ unveiled in the recent budget are an attractive proposition for those who can demonstrate that they meet the Minimum Income Requirement in the form of a guaranteed income of £12,000 per year. Individuals with this level of secured retirement income can opt for a ‘drawdown’ of their UK pension which will allow them to either take a tax free lump sum of 25% and / or draw down the pension over a period of time. There are no restrictions on how much can be withdrawn from the fund i.e. you could encash the fund in its entirety should you wish to do so. It should be noted however that any amount withdrawn over 25% will be taxed at the marginal rate. It may therefore be prudent to make withdrawals over a number of years in order to manage exposure to higher income tax levels.
Use of the drawdown facility may indeed be a worthy pension planning option as opposed to the purchase of an annuity. There is still however the hazard of tax to be considered. Any lump sum passed on at death will be taxed at the rate of 55%.
QROPS: A possible solution
Although a QROPS vehicle may not be suited to all expats holding UK pensions, it should not be overlooked as a possible solution in their retirement planning. The following attributes should be considered:
- A QROPS offers income flexibility similar to that of the drawdown facility available to UK pension holders
- You can take up to 30% of your pension fund tax free on retirement. This is higher than the current UK limit.
- Assets held in this scheme fall outside of your estate for Inheritance Tax purposes if you die while living overseas.
- Upon death, the full residual value of your QROPS passes to loved ones
The ‘trust’ vehicle is a key factor for expats choosing the QROPS route over flexible drawdown, in that the individual is removed from the ownership of assets and therein exposure to the 55% tax charge on death were he to leave his pension in the UK.