Further significant changes to UK pension taxation and reliefs were announced by the Chancellor of the Exchequer in his Autumn Statement on 5 Dec, 2012. Detailed aspects of some of the changes have since been clarified through the publication of draft legislation in recent weeks, and others are awaited shortly. This article aims to provide a handy guide to what’s changing and when, which affect QROPS and which do not.
Firstly, let’s start with some good news for women, or at least those who are in pension drawdown or about to start drawdown. Female emancipation of the Government Actuary Department (GAD) tables took effect from 21 Dec, 2012, when female tables were dropped and providers are now instead to use the current male tables for females as well.
The move to unisex drawdown is a consequence of the ECJ ruling in the Test-Achats case. The result will be an increase in permitted drawdown rates for females of between 6% and 10%, and around 90,000 women are expected to be liberated (in GAD terms at least) over the next three years.
If we feel happy for these lucky women, we should feel sad for their grand-daughters, because the same move to gender neutrality has increased car insurance premiums for 17-20 year old women by 16.4%, while 17-20 year-old men now pay 10.7% less than before. That’s the price of equality.
Widespread industry campaigning has succeeded in persuading the UK Government to reverse their unpopular reduction in maximum drawdown in 2011, when the limit was reduced from the long-standing 120% of GAD to 100%. The 120% limit will now be restored for drawdown years starting on or after 26 March, 2013. Could it be that the change, which positively impacts on 500,000 drawdown pensioners and takes effect in 2013-14, might make the said pensioners more disposed to vote Conservative at the election due in 2015?
UK providers are still upset though, because the higher 120% limit does not kick in until the start of the next drawdown year after 25 March, so some pensioners could face a wait of up to 14 months before being able to avail of the 120% limit.
A point to note though is that whereas all UK pensions, including Sipps, are restricted to GAD rates, some QROPS are not: pensioners with QROPS (and former QROPS) who are UK non-resident and not subject to the “member payment provisions” are not restricted to GAD limits unless the QROPS’ own tax environment imposes it.
So Isle of Man QROPS (and former QROPS) are not capped at 120% of GAD, whereas Malta and many others are capped. Isle of Man actuarial drawdown, for example, is currently equivalent to around 150% of GAD (assuming an investment return of 6% pa) so UK rules still have a long way to go before they can give the same flexibility as some QROPS.
On the subject of QROPS, the QROPS regime will be tweaked to impose a new requirement on providers to notify HMRC every five years that their scheme continues to meet the conditions to be a QROPS.
Secondary legislation (such as regulations) will also be introduced to compel providers to continue to report payments to HMRC, even if their scheme has ceased to be a QROPS. At the time of writing, the draft legislation in question is still awaited.
While of passing interest only to UK non-residents, the annual allowance (the maximum pension contribution eligible for tax relief) is to reduce from £50,000 to £40,000 in 2014-15. Up to 140,000 people are expected to be adversely affected. UK tax relief on pension savings continues to be flayed: remember that the annual allowance was £255,000 as recently as 2010-11. Further reductions are surely to be expected in future years.
Further LTA cuts
Of all of the changes announced, the one that we consider most ominous is the further cut to the standard lifetime allowance (LTA), which reduces from £1.5m to £1.25m, also from 2014-15.
Taken together with the reduction in the annual allowance, the measures “support the Government’s objective of … pensions tax relief that is fair, affordable and sustainable” and “an integral part of the … deficit reduction plans”.
The reduced annual and lifetime allowances are projected to bring in £1bn in extra tax by 2016-17. The LTA cuts affect around 300,000 people, 30,000 of whom will have pension funds between £1.25m and £1.5m in 2014-15.
One thing to immediately reflect upon is that the 300,000 affected individuals will doubtless include a number of expatriates and other UK non-residents. However, these individuals do not need to be affected if they have the right pensions solution. Remember that transfer to a QROPS crystallises a person’s pension: it is tested only at time of QROPS transfer against the LTA. If it is less than the LTA at that point, the spectre of future lifetime allowance tax charges is removed once and for all, regardless of how large the QROPS grows in value in the future.
Successive cuts to allowances (see table above) are of concern. Since the Coalition Government came into power in 2010, it has cut the LTA on two occasions so far, and by over 30% to date. We doubt very much whether further cuts can be ruled out, particularly as the deficit reduction plans referred to are in considerable need of help. Until the LTA is below the politically sensitive £1m “pensioner millionaire” level, we believe that more cuts are sadly to be expected.
For clients still stuck in the UK pensions regime (whether through pensions left behind there or as a result of pensions transferred to a Sipp), the prognosis is therefore bleak. Anyone with a current fund of as little as £0.5m could be looking at lifetime allowance charges in as little as 12 years time, if the LTA was to reduce to £1m and remain at that level. Transfer to a QROPS is one way to sensibly eliminate the risk of unnecessary UK tax charges, and bring certainty to the situation.
Successive changes to the LTA also introduce complexity for anyone still stuck in the UK pension system. Following “A-day” in 2006 (which believe it or not was intended to provide “pensions simplification”), we encountered a world of “Primary Protection” and “Enhanced Protection” – transitional measures by which members had a temporary window in which they could elect to protect pre-existing pension assets from the new lifetime allowance charge.
When the LTA fell from £1.8m to £1.5m in April 2012, we were then presented with “Fixed Protection” (2012-style), which enabled individuals to apply to protect uncrystallised pension rights and retain an LTA of £1.8m (and a maximum tax-free lump sum of £450,000 instead of £375,000). This came with conditions however: for example, no more pension contributions can be made.
The ability to elect for Fixed Protection (2012) ended on 5 April, 2012, and that, we thought, was that. However the lowering of the LTA on 6 April, 2014, means it’s all change again, and further protection will be available: Fixed Protection (2014-style) is expected to work in the same way as its 2012 predecessor. Individuals who do not have primary, enhanced or fixed protection (2012-style) will be able to apply, but will have to do so by 5 April, 2014, after which the option is taken away (doubtless until the next reduction to the LTA after that). Fixed protection (2014) will give an LTA of up to £1.5m, but again this goes hand-in-hand with the condition that no further contributions will be allowed.
The Autumn Statement announcement also indicated that the Government will discuss with stakeholders whether a “personalised protection” regime should be offered in 2014 in addition to fixed protection (2014). The idea would be that personalised protection would offer more flexibility to individuals with existing pension rights of between £1.25m-£1.5m, preserving an LTA of £1.5m and enabling the member to continue making contributions; members however would be subject to the normal lifetime allowance charge if, on crystallisation, benefits exceed the personalised £1.5m LTA.
Faced with all of this continuing change, crystallising benefits now through a QROPS transfer can provide simplicity and certainty, and for this reason has much to recommend it.