Lifetime allowance gets squeezed again!
The recent UK budget was the usual mish-mash of the Chancellor giving with one hand and taking back with the other. The perceived success of a budget often revolves around who spots which measures and how they are subsequently affected. So, if a tax ‘giveaway’ such as the increase in the personal allowance isn’t balanced off by, say, an increase in VAT, everyone is a winner. Or are they? The answer to that is ‘it depends’. If you’re a public service worker about to lose your job due to savings in the national deficit bill, you aren’t going to benefit at all if you then can’t find alternative employment.
The Lifetime Allowance (LTA) on pension values was reduced from £1.25m to £1m, effective from April 2016. Indications are that this won’t be reversed by the new government irrespective of who gains majority power or which colour of coalition is returned. The Liberal Democrats and Labour parties had both mooted the same plan before Osborne stole their clothes with his own announcement. This reduction means anyone with a pension pot greater than £1m after April 2016 will be taxed at a rate of up to 55% on the excess. Note this doesn’t only apply to contributions made, investment growth is also included.
This means those with large pots that perform well could find themselves being penalised for showing prudence and wisdom. The £1m will be indexed from 2018, however at current cost of living indices and inflation forecasts, it is not likely to make a significant difference. Expats who have worked for some time in the UK in senior positions tend to be in possession of fairly large pension pots. Many who are nearing retirement will already have fund values of circa £1m; younger executives may also be well on the way to securing such a figure. It is not unusual to come across clients whose pension pots are in the region of £500,000+ before the age of 50. Let’s have a look at some fairly straight-forward calculations.
As a ‘rule of thumb’, a pension pot of £500,000 will double in 7 years at an average investment growth rate of 10% per annum. It would take 14 years at 5% growth. Whilst achieving 10% per annum takes a bit of doing, it is not unreasonable if your portfolio of investments is managed well. In recent years we have witnessed average annual returns well in excess of this number. 5% should be easily achieved without doing much more than investing in an average managed fund over time. The above figures assume no further contributions are made into UK pension plans, as such they are extremely conservative for anyone who is UK resident.
For expats with pension pots in the region of £500,000, Qualifying Recognised Overseas Pension Schemes (QROPS) provide the ideal solution:
- By transferring to a QROPS the LTA is suspended at that point in time.
- Whatever value your pots have reached will therein be registered with HMRC, and will not increase from that point unless and until you become UK resident again and resume contributions to a UK pension.
This has a number of benefits:
- Any pension plans accrued in other countries are outside the LTA regulations
- Your pension can therefore still be built up without fear of LTA taxation.
- QROPS offer access to a wide range of investment funds globally, which means that with careful management your pension portfolio has the opportunity to grow up to and beyond the LTA without having adverse UK tax consequences.
By transferring to a QROPS and keeping your UK pot below the £1m LTA limit your total saving potential is almost unlimited.
Example
An expat decides to transfer his UK personal pension worth £500,000 to a QROPS. After 20 years, the value of the fund has grown to £1.5m. By making such a transfer, the total saving in terms of LTA taxation would amount to £275,000 (55% of £500,000 excess over £1m).
This relatively simple piece of tax planning could rebalance the budget in your favour, despite the best efforts of the Chancellor!
Phil Loughton – AXIS Strategy Consultants
