No expat wants to pay a whopping 45% Income Tax on the income from their UK pension fund.
Numerous adverts on the internet warn that leaving your pension in the UK would leave a 45% Income Tax to pay- all paid to HMRC in the UK
Worrying stuff isn’t it!? However, is this something that could EVER affect you?
Let’s Look at The Facts
As a pension adviser in the UK with hundreds of pensions under our servicing we have yet to see anyone be penalised with a 45% tax on death.
These adverts are totally misleading for the vast majority of people, only designed to worry people or motivate them into moving their pensions outside the relatively safe waters of UK regulation into the more choppy waters of the offshore “pensions industry”. I use the words offshore “pensions industry” advisedly as, in many cases, this is just a group of salesmen operating a strategy to invest money into old fashioned investment bonds or structured products. For those with the right advice, properly regulated and insured, these choppy waters can be navigated properly.
Should a pension be moved from the UK to QROPS purely to save 45% Death Tax?
Who Pays 45% Death Tax on their Pensions?
An expat over the age of 75 may pay this tax but only in the situation the fund is taken out completely before April 2016. Indeed if the expat is under 75, or the fund is left invested for their spouse or children then no 45% death tax applies.
So the next question is, should a pension be moved from the UK to QROPS purely to save 45% Income Tax.
Who Pays 45% Income Tax on their Pensions?
An expat with a UK pension is unlikely to have any earnings in the UK subject to Income Tax. So, let us assume the UK pension is the only income producing asset in the UK.
The UK additional Income Tax rate of 45% is applied to all income above £150,000 per annum.
Anything below this will have lower rates of Income Tax.
Let’s assume a 65 year old married expat has a UK pension that is £150,000- just under the 45% Income Tax band. How big a fund would he/she have? *
( * using a SIPP/Money Purchase scheme for this example)
If we look at UK annuity rates for a married person with a 50% spouses‘ pension and some protection against inflation ( say 3% a year increases ) the rate is 3.7%.
Using the example above, it would need to be bigger than a staggering £4 million pounds, which is well in excess of the Lifetime Allowance anyway!
How many expats expect to have funds this size? Would a transfer to a QROPS save 45% Income Tax- No, it wouldn’t as it would be caught by the Lifetime Allowance transfer and be taxed anyway!
Every UK citizen currently has a lifetime pension allowance, which is the amount that can be accumulated into a pension , without additional taxes being applied.
The current rate in 2015 is £1.25 million however this is set to be reduced in April 2016 to £1 million.
What They Don’t Tell You
HMRC say that if a transfer is made to a qualifying recognized overseas pension scheme, over and above the individual’s available lifetime allowance, then that that amount would be charged at the rate of 25% and then any further income would be charged at the rate of the country in which you live.
So, even if you were lucky enough to have a fund of £4 million pounds in 2016, about £3million of it would be taxed at 25% on transfer. A loss of £750,000.
Of course, you would then pay Income Tax in the country where you lived on top of this.
How Big a Fund Pays 45% Tax if encashed in the UK?
A fund would have to take income above £150,000 in order to pay 45% tax on it. Let us take the typical average fund of £260,000 then if you were to take the entire fund out over 2 tax years then in the UK you would pay tax on 2 amounts of £130,000 and allowing for personal allowance and the PCLS( non-taxable part of the fund ) the actual tax rate you would pay would be around 21%. If you took the money out over 3 years then the rate would drop to less than 15% and so on.
The point is that very few people, in our experience, actually encash a fund in one go and often take out income or chunks of PCLS and income. In fact in our experience no-one pays 45% income tax on the whole of their funds!
Clearly the biggest issue is for those with funds that are in excess of the Lifetime Allowance (very few people) or those over age 75 who die and whose relatives require full access to the funds immediately (Again, in our experience very few people).
Outside of these two groups of people then the adverts are nonsense in the vast majority of cases. Most importantly it ignores the fact that double tax treaties mean that different countries would apply tax on income, lump sums or death in a different way which may actually mean it is the worst decision to move it away from the UK.
I would hope that this proves that any website suggesting up to 45% Income Tax would be saved on transfer is trying to deceive.
I would suggest further that a website that suggests up to an extra 45% income in retirement, by transferring to a QROPS, is more interested in promoting commission sales revenue for the offshore salesperson than your retirement wellbeing.
Back the LTA
As it happens, there are ways to avoid the effects of the LTA ( if under £1.25 million- or if protected* ). Though not if your fund is big enough to generate a 45% Income Tax charge!
*Specialist advice would be needed to check on the protections offered to UK pension schemes close to the LTA
- QROPS, BCE and the Lifetime Allowance Charge
- Lifetime Allowance Charge at 75
- QROPS and the Lifetime Allowance
- Lifetime Allowance 2015
- Tax Planning with SIPPs and the LTA
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