Individuals considering the transfer of their UK pensions to a QROPS should be aware of changes in the Lifetime Allowance (LTA) as the end of the tax year approaches. The current LTA of £1.5m is the maximum amount of pension saving you can build up over your life that benefit’s from tax relief. If you build up pension savings worth more than the lifetime allowance you will be obliged to pay a tax charge on the excess.
As of 6th April 2014 the LTA will become £1.25m for the forthcoming tax year. We have witnessed a steady erosion of the allowance threshold from £1.8m in the 2010 / 11 tax year, which was subsequently reduced to £1.5m for 2013 / 14, and will be capped at £1.25m in the next tax year.
A transfer from a UK registered pension scheme to a QROPS is considered to be a Benefit Crystallisation Event (BCE). When an individual crystallises their benefits in order to take a pension commencement lump sum and / or facilitate the withdrawal of income from their pension capital, the value of the savings being crystallised is tested against their available Lifetime Allowance. As soon as the value of the total UK pensions exceeds that limit, an individual would be subject to a tax charge of up to 55% on any BCE upon retirement or death. The transfer of your UK pension to a QROPS would arrest the growth on your personal LTA at today’s value.
The new LTA threshold
As stated, the present situation is set to change on April 6, with a reduced LTA of £1.25m. Some people will already have pension funds of over £1.25m; many others can envisage their existing pension pot exceeding this limit with future contributions before they reach retirement. The new limit will have an impact on:
- Individuals who intend to start taking income from their pension savings
- Those who wish to increase the level of retirement income they need from those savings
What it means to you
Individuals living abroad who wish to access their pension savings in the current tax year may gain over the longer term from the transfer of their UK pension into a QROPS and therein the crystallization of benefits. The net result could be:
- An increase in the available pension commencement lump sum that is tax-free from any future crystallisation
- Reduced likelihood of suffering an LTA tax charge on part of the future value of their pension fund whenever they draw on those untouched pension savings
Pension funds are easy targets for governments wishing to raise revenue; we have already seen one such ‘raid’ under the last Labour government. Time is running short for those who wish to protect their pension fund against the forthcoming LTA change. However this may not be the last reduction in the LTA; the current trend suggests that the threshold will be lowered further to £1m at some stage in the future. There remains a window of opportunity for pension planning!