UK Government Issues Response to Flexible Pension Consultation

28 July, 2014

As part of Budget 2014, the UK Chancellor announced revolutionary changes to the current rules regarding how a person can access their UK pension at retirement. The Government has since consulted on these proposals and issued a response setting out key Government decisions on the changes. The detail regarding how these changes will be specifically implemented continues to be worked through by the government and interested parties. Final legislation will come into force in April 2015.

Some of the key decisions set out in the 21 July 2014 government response that will be specifically relevant to expatriates include:

New tax system

• The introduction of government legislation that will enable defined contribution schemes (workplace pensions) to offer increased flexibility in how their members access their pension benefits in the future (even if their scheme rules do not currently permit such changes). This means that where a scheme wishes to do so, it may offer members options other than just an annuity at retirement.
• Changes to current tax rules to allow pension providers more freedom to create new products.
• An increase to the minimum age at which people can access their private pension from age 55 to age 57 in 2028. This change will apply to all pension schemes save for those in the public sector that will not link their normal pension age to the State Pension from 2015 (like Firefighters, Police and Armed Forces).
• The 55% tax charge on pensions applied on a members death when a pension is in drawdown will be reduced in 2015. The level of reduction will be announced in the Autumn Statement. This tax charge is currently applied when a member is in drawdown and the beneficiary wishes to take the remaining pension as a lump sum payment.

Defined benefit schemes

• Transfers from private sector defined benefit schemes (final salary pensions) to defined contribution/personal pensions (excluding pensions in payment) will be able to continue. However, transfers from unfunded public sector defined benefit schemes will be banned in the future.

Consumer research from the National Association of Pension Funds suggests that the greater freedoms being introduced by the UK government will result in higher levels of savings and more people saving for retirement. For expatriates, the greater flexibility being introduced is welcome as it provides greater retirement planning options, particularly alongside retirement savings built up in your current country of residence. For example, for those in defined contribution and personal pensions, they will be able to access their pensions in full from age 55 without the need to purchase an annuity.

While the temptation for some expatriates will be to try and “cash-out” their UK pensions at age 55, to bring their pension pots into the country where they currently reside, this will in many cases not be the best option. For example, if a double taxation treaty exists between the UK and their country of residence which enables their UK pensions to grow tax deferred, their UK pensions remain a valuable vehicle in which to save for retirement. As a result, access to good pensions’ and tax advice, specifically for the expatriate/their place of residence, will be important at the time of retirement.

For an earlier article on Budget 2014 go to Radical Changes to UK Pensions Proposed.