UK expats are being urged to consider potential tax traps following the Chancellors radical announcement to give savers in UK defined contribution (DC) pension total freedom on how they access their pension pots.
Pension changes in the Budget include proposals that, as from 2015, many savers in DC pensions will have the option to take as much cash out of their pension as they wish, so long as they are aged 55.
Gary Boal, managing director of Boal & Co, warns that there may be some as yet unforeseen consequences for expats who take the cashing-out option.
“It would not surprise me if traps are put in place to make sure in the case of non-residents that the tax is caught in the UK,” says Boal.
He explains that despite being non-resident in the UK, expats may be caught under certain double tax agreements or local tax rules if planning to encash their UK pension. For those with reasonable size pension pots then cash taken out will be taxed at the highest marginal rate, which in the UK is 40%-45%.
Other considerations coming into play will be potential tax on investment returns if cash is reinvested, as well as inheritance tax liabilities.
Boal also questions the logic of such a move in the light of HMRC’s crackdown on pension liberation schemes.
“How come cashing out a pension in full at age 54 years and 11 months is a heinous crime (pension liberation, no less) but doing it 1 month later is suddenly great and the best thing since sliced bread? It’s very curious logic.”
While Boal believes that the changes fly in the face of financial and tax planning (unless you want the Lamborghini!), it does herald opportunities for Qualifying Recognised Overseas Pension Schemes (Qrops) which potentially offer a more secure tax-free environment for pension savings.
“We’re still analysing the situation, but we definitely do still see a big role for Qrops, especially with the final salary pension transfer option looking doomed post 2015. Qrops will certainly not be static and we’re looking closely at ideas for how they can evolve in the next year.”