Pensions for British Expatriates

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Pensions for British Expatriates

From 1st April 2006 (known as A-Day) major changes to pension legislation in the UK were introduced which have wide ranging and largely beneficial implications for British expatriates. Up until now most British expatriates were excluded from contributing to UK approved personal pensions unless they had earnings subject to tax in the UK or were allowed to remain members of UK approved employer's schemes. With A-Day all this has changed.

Outline of the New Arrangements

Firstly, the so called "concurrency" test has been removed. This prevented investors from being active members of two concurrent pension schemes unless they were linked to the main employer's scheme via additional voluntary contribution. The change means that any UK citizen is able to join any type and any number of pension schemes at the same time. However, there are restrictions:

1. Maximum contributions into a plan is the higher of £3,600 per annum or 100 percent of earnings (subject to the overall maximum of the annual allowance)
2. The annual allowance has been set for the year 2006/07 as £215,000 contributions rising eventually by the year 2010/2011 to £255,000 per annum.
3. A new concept, the Standard Lifetime Allowance (SLA) has been introduced. Briefly this is the maximum amount of the pension "pot" which will not be subject to any tax penalties. In 2006/07 this is set at £1.5million rising by 2010/2011 to £1.8million.

Provided these limits are not breached, individuals can obtain tax relief on contributions and the funds themselves will not be subject to income tax, capital gains tax or inheritance tax. Eventually 25 percent of the funds can be withdrawn tax free. Naturally, once the pensions are in payment they will be subject to UK income tax.

Age Restrictions

From A-day 2006 to April 2010 the minimum age to draw a pension benefit is 50, but if ill health strikes there are grounds for taking pension benefits earlier. From 2010 the minimum age to take a pension rises to 55.

From A-day pension benefits must be taken by age 75 and cannot be deferred beyond that date.

Changes 

• If there are earnings subject to UK tax, then pension contributions can obtain full tax relief. 
• If there are no UK taxable earnings, pension contributions can still be made, but without the benefit of tax relief at source. 

The vast majority of British expatriates can make unlimited contributions to an approved UK Scheme. There are, however, plenty of individuals who are not resident for UK tax purposes but continue to have their salaries subject to UK tax, with Crown Servants being an obvious example. 

A person who falls into one of the following categories could consider making contributions to UK pension schemes after April 2006:

Pros and Cons

As ever, there are advantages as well as disadvantages in investing in UK pension plans.

Advantages

For many the security of dealing with approved UK institutions is a major benefit. A key advantage is that the fund built up will not be subject to income tax or capital gains tax while it is accumulating.

In addition, if death occurs before pension benefits are taken, a lump sum can be returned in full without any tax (including inheritance tax) and paid to nominated beneficiaries.

When pension benefits are taken, 25 percent of the fund can be taken as a tax free lump sum. Naturally there is a wide choice of providers and a range of funds to suit all appetites for risk.

Disadvantages

For those who are non-resident with no taxable UK earnings, the downside for the contributions is that there will be no tax relief granted. Eventually when the pension comes into payment, UK tax will be deducted at source but this may be avoided using the Double Tax Treaties with the country of residence.

Information supplied by Aidan Bailey, The Fry Group
Web: www.thefrygroup.co.uk / Tel: 6225 0825 / Fax: 6225 4679  / e-mail
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