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BABC MEMBER FLORIN PENSIONS

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It is the greatest shake-up in UK pensions for over 100 years. George Osborne’s introduction of new UK pension freedoms in April 2015 has revolutionized how people are now able to access their UK personal and occupational pensions. The UK pension has, almost literally, been turned on its head.

All these freedoms now offer great opportunities for UK pension and general wealth planning. However, you may be wondering how these changes impact you as a British expatriate living in the United States.

Two important features of the new UK pension freedoms are:

Greater Flexibility When Taking Pension Benefits

Under UK legislation, you are currently able to start drawing pension benefits from age 55. As a result of the new UK flexibilities, if you have an occupational pension you should not now be forced into buying an annuity at retirement by your employer scheme. Those in such schemes, and personal pensions, should be able to draw income from their pension in amounts and at times desired with no cap on the amount that can be drawn. New access options include:

•             Flexi-access drawdown

This is a new type of drawdown pension where you are able to take a 25% UK tax free pension commencement lump sum and draw taxable income in amounts and at times desired with no cap on the amount that can be drawn.

•             Uncrystallised funds pension lump sum

This provides the ability to take one or more lump sums from your pension. In the UK, 25% of the pension is paid free of UK tax and the remaining 75% is taxable as pension income.

Improved UK Death Benefits

The punitive 55% pension death tax that used to apply in certain circumstances when your pension passed to a beneficiary has been abolished. Now, if you die before age 75 (whether or not you have drawn from your pension) then 100% of the value of your pension can be paid to any beneficiary free of UK tax either by way of a lump sum or by drawing a pension income as and when the beneficiary desires. If you die after age 75, then a beneficiary can choose take a pension income as and when desired and be subject to income tax. Another option for the beneficiary is to take a one off lump sum, although it would be subject to a 45% UK tax in 2015/16, but reducing to a person’s marginal tax rate thereafter.

The removal of the 55% pension death tax has been seen in the UK as a game changer, removing many of the reasons why people have not always put as much money into pensions or retain money in pensions beyond their death. Now, a UK pension can start to be viewed as a valuable wealth transfer vehicle allowing assets to cascade down the generations.

What Does This Mean for the British Expatriate?

For British expatriates in the United States, there are two important questions to ask:

  • Will your existing pension provider afford you all of the new freedoms; and if so
  • How can you best utilise them? 

While UK legislation is permitting greater flexibility, pension providers are not obligated to provide such flexibilities to their members. As a result, pension members are now wrestling with whether their UK pension provider will in fact offer them the full flexibility now available.

This problem is illustrated by Friends Life (one of the largest UK pension providers) who recently sent letters to its customers announcing that it will not be providing flexi-access drawdown to its’ customers. This represent a U-turn on an earlier announcement that it would. If a Friends Life customer wishes to have more flexible options, a pension transfer to a different provider would be necessary.

For the British expatriate, it is also important to understand the tax implications of drawing a UK pension income as a United States taxpayer.

If you left behind a UK occupational or personal pension and want to know what your options are under your existing plan, or as a result of pension transfer, now is a good time to undertake a review of your pension. Being an expatriate, particularly living in the United States, can make understanding and managing your UK pension even more complex. For this reason, we always recommend consulting a pension adviser who understands and works with British expatriates in the United States.