No one expected the abolition of the LTA in the Budget. Rumours always abound within the industry the week before, but major structural changes rarely happen.
The industry expected the limit to be restored to £1.8m, but the Chancellor went even further, with the abolition of the LTA completely. The rationale was to encourage highly paid health professionals to remain in work longer. As a result of certain anomalies, it had become pointless to carry on due to a combination of technical factors which unfairly penalised Doctors, Consultants and other specialists in the health service.
The Lifetime Allowance, represented by the amount of pension savings which can be built up before a tax charge is applied, has been gradually reduced from the high of £1.8m in 2010/11 to £1,073,100.
Low interest rates inflated Defined Benefit ‘Cash Equivalent Transfer Values’ well beyond the assumed 20 times full annual pension level, giving members a very attractive choice when considering moving their DB pension into a Defined Contribution environment. Interest rates are now significantly higher, which has resulted in much lower CETVs and notably reduced numbers of DB transfers.
When interest rates were low, it wasn’t uncommon to see CETVs at 40+ times the expected full pension. So, although the DB Lifetime Allowance liability was calculated at 20 times pension, CETVs were considerably higher. For example, a pension of £30,000 per annum would be tested against the Lifetime Allowance at 20 times £30,000 – £600,000. This is well below the Lifetime Allowance limit, and a CETV of perhaps £1,200,000 might be offered. By transferring to a DC scheme, only 60% of the LTA would be crystallised despite the actual amount being over the limit.
Additionally, for those who live outside the UK, it was possible to transfer to a QROPS and eliminate any present and future LTA liability. Many took advantage, and QROPS have proved to be a valuable tax planning vehicle for expats and internationally mobile people.
QROPS and the abolition of the LTA
Does the abolition of the LTA mean QROPS are essentially redundant now? I would argue no. There are many other benefits of transferring UK pensions into a QROPS:
- First, income withdrawals can be taken in the currency of choice and paid gross of tax directly into the member’s local bank account. Cash holdings don’t have to be exchanged into Sterling, then exchanged back into Euros, as is common with UK personal pensions and SIPPs. Most EU-based residents know that denominating their pension in the currency of everyday use eliminates risk. Using a QROPS can avoid unnecessary exchange costs.
- No UK withholding tax is payable, which avoids the cumbersome process of either reclaiming the tax from HMRC or balancing off tax paid in the home country with tax paid in the UK. It is possible to create a non-taxed payroll code with UK pension providers, but why do this if it can be easily avoided?
- Most importantly, pension regulations have a habit of changing according to economic conditions and which party is in office. Considering that the Labour party are currently some 20%+ ahead in the polls and are likely to win the next election, they will install their own tax rules and regulations. Labour have stated that they will reintroduce the Lifetime Allowance as soon as possible after being elected. It’s also possible that even if the Conservatives win the next election, they will do the same. Indeed, the same Chancellor who reduced the LTA and suspended CPI increases is now the Prime Minister.
QROPS are still a viable way of managing pension funds for those who move away from the UK. They aren’t a universal solution for everyone, but can play an important role when managing retirement income and currency exposure.
As with every aspect of financial planning, it’s important to ensure individual elements work in context with each other and qualified advice is sought before making what could be life-changing decisions.
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