Tax Planning with SIPPs and the LTA


UK pensions offer fantastic opportunities for expats, especially those who wish to consider tax planning with SIPPs and the LTA (Lifetime Allowance).

Since the  spring Budget 2017, UK pensions will now take centre stage for many expats and SIPPs will be re-enforced as an important planning tool – this was always the case but has often been ignored until the recent imposition of the 25% transfer tax charge on some QROPS transfers .

Some offshore advisers, and some who claim to be experts, are stating  There are no tax planning opportunities based around lifetime allowance or benefit crystallisation events.

We disagree. There is available tax planning with SIPPs and the LTA (Lifetime Allowance).

Tax Planning with SIPPs and other UK pensions

The very nature of UK pensions provides for considerable tax planning.  The initial advice will be to confirm any LTA  protection is in place, and if not, then applied for. We have found that some pension members were previously advised to do this and had forgotten or not realised that they had this protection.

Firstly, it is important to note that a transfer from a UK pension to another UK registered pension is not a Benefit Crystallisation Event  while a transfer to a QROPS has always been a Benefit Crystallisation Event  – So, the decision where to transfer is the first part of tax planning. UK pensions are not just SIPPs; SIPPs have just become a lazy jargon for those who were selling the idea of UK pension transfer.  However, for now let’s focus on tax planning with SIPPs and the LTA.

Let’s examine tax planning with SIPPs and the LTA  in more detail while understanding there are other options to consider. There is drawdown and UFPLS- very much tax planning with SIPPs. When income is taken from a SIPP, it causes a Benefit Crystallisation Event . Let’s look at a simple example.

Uncrystallised funds pension lump sum (UFPLS)

Uncrystallised funds pension lump sum can be used to deplete the fund in one go, taking 25% free from UK tax  and the remaining 75% as  taxable income.

What is the tax planning with SIPPs opportunity here?

Expats need to check the Double Tax Treaty and whether the UK PCLS (often incorrectly known as the tax free lump sum) is taxable in the country of residence ( Spain is an example, where it would be taxed )

Mr Smith has a £500,000 fund in a SIPP, he takes only a portion of the tax free cash and a portion of the taxable element. He takes £20,000 out of his pension.

This amounts to £5,000 of tax-free cash and £15,000 as income. Taking income this way could mean that only 75% of the income is chargeable to income tax. In Spain and France the PCLS element would also have a reduced tax applied, but this was true of QROPS before, though rarely mentioned.

Provided the funds perform well enough, and a lot will depend on avoiding expensive commission driven insurance bonds with non-clean funds with high commissions, then the fund should sustain an ongoing flexible income. A Benefit Crystallisation Event  will occur at each annual withdrawal but as the fund is under the £1 million LTA, there is no tax charge.

Will this avoid Lifetime Allowance?

Yes, until the Protected Lifetime Allowance is reached, which could be many many years away or never if:

  1. The rate of the Lifetime Allowance increases with inflation  or indeed is raised again as it was twice a few years ago, or
  2. The value of fund remains stagnant, or
  3. If legislation changes (which it constantly does)

Our previous blog  covers some tax planning around the Lifetime Allowance

Death and tax planning with SIPPs

SIPPs are now an excellent tool for wealth preservation, to pass funds tax effectively to future generations. Something we will cover in a future blog. Below the age of 75, upon death, the pension can be passed tax free to a UK resident (You have to check the country of the beneficiary to find out whether it is tax-free in that country).

Over the age of 75 and below the Protected Lifetime Allowance,  tax does not need to be paid . Funds above the Lifetime Allowance will result in a tax charge, but only on the element in excess of the Lifetime Allowance.

For someone with no protection and a fund of £1,050,000 they will pay 2.6% tax. If you consider that planning to avoid the tax costs a lot more than this, then you can see that SIPPs will still provide a good alternative.

Summary Tax Planning with SIPPs

Despite what others may say, there are tax planning opportunities offered to expats with SIPPs that are on a low cost platform with low fund fees and no hidden commissions. We are not saying there will never be tax, we are simply saying that you can reduce tax and plan for it.

 

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

This article was published on 20th March 2017

“About

Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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