UK Pension Reform

Do the Maths Before You Leap

Do you have your pension pot(s) just sitting waiting but you don’t want to buy an annuity and the temptation to pull the cash out certainly seems a dream come true with the newly proposed UK Pension Reforms?

Until now, Qualified Recognised Overseas Pension Schemes (QROPS) were professed by some unscrupulous advisers and managers to hold the key for many who had moved their pensions offshore to “release” or “liberate” their entire pension funds without being subject to tax. However, almost overnight, one of the largest offshore jurisdictions to service the market was struck off HMRCs approved list, possibly because of this association. Today, 3 years later, the proposed UK reforms are set to legalise such transactions from 6th April 2015.

Before you jump or take a giant leap, it would appear that many have become overwhelmed by the euphoria of drawing 100% of a pension fund that has benefited from years of tax relief on contributions (as well as on the growth). In doing so, an inadvertent heavy tax bill could be just around the corner. The sensible advice is to do the maths before you move ahead.

Guidance issued from the UK revenue (HMRC) indicates that those looking to draw large sums will be treated as though any initial withdrawal is the first monthly instalment of regular income payments, whereby withdrawals above any tax-free cash limit of 25% suggests that basic rate taxpayers could face an effective tax rate of up to 36%. To put this into a working example, if you were to draw all of the cash from a small personal pension plan of £20,000 – which is common for many – with a quarter being tax-free (25% or, otherwise, £5,000) this would deem that £15,000 is to be paid out every month thereafter. Based on £15,000 per month, this gives an annual assessable income of £180,000 where tax is deducted at source and whether you have a tax code or not. More frighteningly, this will not discriminate between those who are resident and are not resident.

According to Deloitte, the accountancy group, a recent forecast has revealed that up to £6 billion will be cashed out within the first four months of the law being in place and that the majority of people will end up paying too much tax.

The likelihood is that refunds will be made automatically at the end of the 2015/2016 tax year, i.e. after 5th April 2016, unless the saver has already made a claim back from the revenue. For those who want to avoid this, providers and HMRC should have the correct forms and processes in place and for those residing in Portugal, there are perfectly adequate systems already in place to register tax residence via Lisbon which can, thereafter, be communicated with the UK to receive payments gross. All things being successful, you should now already have in place a clear picture of how the Portuguese authorities will assess your withdrawal.

The assessment of certain forms of pension income can benefit from some very generous tax assessments so you must be careful to get adequate expert advice, at least equally from your trusted adviser and also one that you have no current commercial relationship with to get a balanced opinion. Apart from the immediate benefits of getting your hands on your well-earned stash of pension cash, don’t forget to check out the nuances of any Inheritance Tax (IHT) liabilities because you are moving it out of an IHT exempt environment (the pension fund) into your estate and, as such, fully exposed to these forms of taxes. Finally, even with the latest idea to unscramble an annuity by receiving a taxable lump sum from a contract that is already in force (which is not yet government policy), you will still need to tread carefully. In such instances it may not just be the tax bill that will slap you in the face but a shortfall to suit the insurance company could see you short-changed if you don’t do your research and your sums properly.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. The article represents our interpretation of current and proposed legislation and HMRC practice as at the date of the publication. These may change in the future. Tax Planning is not regulated by the Financial Conduct Authority. Not all estate planning solutions are authorised and regulated by the Financial Conduct Authority.

This article was written by Raoul Ruiz Martinez and published in The Portugal News newspaper and Raoul is an independent consultant for Finesco Financial Services Ltd., Glasgow. He can be contacted at the offices of euroFINESCOs.a. either by telephone 289 561 333 or email


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