In April a new law will bring the Isle of Man system more in line with the UK's when it comes to pensions. Brendan Harper investigates the changes resulting from the Income Tax Bill 2007
In previous articles I have outlined the rules for taking up residence in the Isle of Man, and illustrated how Manx residents can be better off in relation to UK residents in respect of the amount of tax they pay on their income.
In this article, I will look at the position of pensions in relation to Isle of Man taxation.
Over the last few years, there has been a lengthy consultation period on the island that resulted in the Income Tax (Pensions) Bill 2007 currently progressing through Tynwald (the Manx Parliament). The changes contained in the Bill are expected to become law from 6 April 2008. Many of the changes will be familiar to the UK practitioner, but with some important differences. The following are the main changes.
It is now possible to contribute to more than one pension scheme at a time as long as the overall contribution limit is not exceeded. This allows a member of a company pension scheme to contribute to a personal pension as well.
Limits and tax relief
For the tax year 2008/09 the overall contribution limit is set at £300,000 a year from all sources (employee, employer and DHSS), and tax relief will be granted on up to 100% of earnings subject to the £300,000 cap. Like the UK, a new £3,600 lower limit will be introduced for those with no earnings, although this will work differently in that tax relief will only be due if there is other income (such as investment income) to offset the contribution against.
Unlike the UK, there is no proposal to introduce a lifetime allowance in the Isle of Man, so residents can contribute up to the maximum for as long as they like without risking punitive taxation on retirement.
Tax-free lump sum
Previously, a maximum tax-free lump sum of 25% of the fund value for personal pensions and a maximum amount based on length of service for company pensions could be taken on retirement. Both were subject to a £150,000 cap.
The Bill proposes to abolish the £150,000 ceiling, and raise the maximum lump sum for a personal pension to 30% of the fund value.
There is now no requirement to purchase an annuity on retirement. Instead, a scheme can go into drawdown along the same lines as the UK - that is, an income of between 0% and 120% can be taken. Drawdown must commence before age 75.
Unlike the UK, however, drawdown can continue after age 75, and the member is not faced with the choice to either purchase an annuity or opt for the Alternatively Secured Pension (ASP) that is the subject of much criticism in the UK.
There are proposals to liberalise the permitted investments within Sipps and SSASs. Previously, unconventional investments required the discretionary approval of the Income Tax Assessor. The Bill now defines permitted and prohibited investments by means of four tests. An investment is judged permissible if it:
- satisfies the duty of care on the part of the scheme administrator and does not contravene the 'sole purpose' requirement (that the sole purpose of a pension scheme must be the provision, for its members, spouses and dependants, of benefits on retirement and death);
- is commercial and entered into on an 'arms-length' basis;
- does not give members/connected persons further personal benefits (other than the sole purpose benefit) from the investment;
- can readily be valued by independent third parties.
This change means that residential property will be a permitted investment within an Isle of Man Sipp for the first time - a distinct advantage over a UK pension scheme.
Tax on death/winding up
If a scheme is in drawdown and the member dies, the remaining funds can either be used to provide a dependant's pension, or the scheme can be wound up and the funds distributed. If the funds are distributed, there is a proposal for a tax charge of 7.5% of the fund value.
This is possibly the most significant difference between the Isle of Man and the UK. If a UK registered pension scheme in drawdown is wound up and a lump sum is distributed, then tax is payable at 35% if it occurs before age 75. After age 75 the charge can be as high as 82%!
If this Bill becomes law, then anyone moving to the Isle of Man from the UK who has substantial UK pension funds should consider transferring them to an Isle of Man pension fund. This made sense anyway as it meant that the retirement income would be taxed at a maximum rate of 18% in comparison to a maximum rate of 40% if the fund remained in the UK.
Following these changes, there are now even more reasons to do so, including:
- higher maximum contributions;
- no lifetime allowance;
- no requirement to buy an annuity;
- no annuity/ASP requirement at age 75;
- ability to leave undrawn funds to heirs, less a 7.5% tax charge;
- wide permitted investment links, including real estate.
A transfer from a UK-registered scheme is possible provided the Isle of Man scheme is registered with HM Revenue & Customs as a Qualifying Recognised Overseas Pension Scheme (QROPS).
- Brendan Harper is technical services manager at Friends Provident International.
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