Advising expat clients on any matters relating to personal taxation can be a complex affair – but an area that advisers can provide a most valuable service.
Getting the right outcome for the client will mean undertaking a highly personal, full financial planning service – and, most likely, an ongoing review as the client moves between jobs and countries.
Their situation can be further complicated by issues such as the source and type of a client’s wealth, and where they will be living when they decide to retire – will it be where the original advice was given, or somewhere else? And whilst advisers generally don’t hold themselves out as tax advisers, it is the post-tax position of any investment or pension planning that really counts, and will need to be considered.
Any actions affecting preserved pension benefits within UK registered schemes, and pension transfers, should of course include the detailed consequences of those actions. In terms of the advisory process, the FCA’s recent Policy Statement 18/6, Advising on Pension Transfers and consultation paper, Improving the Quality of Pension Transfer Advice CP18/7 are mandatory reading for anyone advising in this area.
For those that are not aware, the FCA has been reviewing the challenges for advisers advising an overseas client who is considering moving their defined benefit pension. The FCA have confirmed that they expect firms who are advising clients on these types of transfers to pay particular attention to the levels of returns and local inflation rates, relative to fluctuations in exchange rates, levels of charges on overseas arrangements, different tax considerations, different legislative frameworks and local levels of protection. These are all relevant issues that should be included in the appropriate pension transfer analysis.
I have broken down these complexities into four areas, the Life Time Allowance (LTA), death benefits, temporary non-residence and double tax treaties. A further complexity, The Overseas Transfer Charge, introduced on 8 March 2017, has been covered in numerous recent articles and is therefore omitted here.
1. The Lifetime Allowance (LTA)
Measuring against the LTA
A common reason to transfer benefits from a defined benefit (DB) to a defined contribution (DC) scheme is to defer income, or to drawdown flexibly. However, a DB transfer can result in LTA considerations, given low gilt yields generating historically high transfer values. The assessment against the LTA is often more favourable for a DB scheme pension (20 x pension plus any pension commencement lump sum) as opposed to the cash equivalent transfer value (CETV).
An unauthorised payment charge can also apply in the rare situation that a DB scheme trustee allows a member already enjoying a scheme pension in payment to transfer out if the receiving scheme trustees do not provide a scheme pension. Through seeking flexible benefits, in this situation the member would incur a tax charge of 55% of the value transferred.
Protecting the LTA
When considering how to maximize the available LTA, it should be remembered that Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016) enable members to protect themselves from the fall in the value of the lifetime allowance from £1.25m to £1m.
FP2016 will preserve the pre April 2016 lifetime allowance of £1.25m, but a number of conditions apply, including a restriction on contributions to a DC plan and a restriction on accruals to a DB scheme. IP2016 does not have the same conditions (contributions/accruals can continue to be made), but the member must have had a minimum overall pension value of £1m on 5 April 2016 in order to apply, and only the value on that date can be protected up to a maximum of £1.25m.
Applications for FP2016 and/or IP2016 are best made before crystallisation so that the lifetime allowance test takes the protection into account. It is not too late to apply if the crystallisation has already occurred and any lifetime allowance excess charge that was paid should be able to be reclaimed afterwards from HM Revenue & Customs (HMRC). However, this can over-complicate the process and is not a recommended approach.