In times like these, when governments are carrying too much debt, there’s one thing of which we can be certain: they’ll be tempted to use taxes to try to balance the books.
That may indeed already be occurring over in the UK. Back in March, the UK government announced two items of note during its annual Budget speech: that personal allowances on income tax may no longer apply to non-residents; and a radical change to the pensions system.
End of Personal Allowance for non-residents?
In general, non-UK residents who still receive some taxable income in the country, currently receive a personal allowance, to potentially offset that income against. With the personal allowance due to rise from GBP 10,000 to GBP 10,500 next April, this is no small matter.
However, the government has noticed that several other countries restrict non-residents’ entitlement to allowances, and seem tempted to try to do the same. The government claims that it is falling in line with the majority of EU countries.1 That is to stretch the point somewhat: there are indeed restrictions on personal allowances for non-residents, but 16 of the 27 other member states do not disqualify non-residents immediately – they apply a test. Six EU countries do generally allow non-residents to qualify for an allowance. Only two countries so far do not allow such a benefit under any circumstance – Malta and Bulgaria. In the case of the latter, it doesn’t even have a personal allowance system, either for residents or non-residents.
In any case, the UK proposal has not been implemented yet – the issue is currently under open consultation until 9th October – but it’s certainly something to keep an eye on. Almost all UK nationals resident in Thailand could potentially find themselves worse off of their personal allowances are scrapped.
Pension changes
The radical change in retirement funds is the allowance of people with company or private pensions to opt for a lump sum cash-out on retirement. This will take place under an initiative called Freedom and Choice in Pensions. That title may be true but, whilst it has yet to be confirmed, one could assume that the lump sum withdrawn will be subject to UK tax at the marginal rate2,3, so it could equally be called A massive tax recoup for the Government, or so the projected tax take from this little wheeze would seem to imply.
Under the old system, those who had a company or public sector retirement fund were entitled to an annual payment from the pension scheme when they retired. The amount each person would receive was based on the total they had accumulated over the years, prevailing interest rates and the pension fund’s actuarial assumptions (crudely speaking, how long they thought that person would last).
The government received tax on these annual amounts, of course but only as and when they were paid.
The upside of this system was that once you had retired, you had a guaranteed income for life. The downside was that you were stuck with a fixed trickle of money entering your account and there was nothing you could do to increase it.
Transferring Out
However, in order to be compliant with the European Union’s principle of freedom of movement of capital, the UK approved schemes whereby a person living outside the country was entitled to move their pension pot to another country.
This brought certain advantages: several jurisdictions where these schemes were held were low-tax, such as Gibraltar, Guernsey and the Isle of Man. Also, the pension fund was outside UK government control, so any changes to UK pension rules would not directly affect the fund. Added to that – depending on the scheme – in the event of the pension-holder’s death, the new rules potentially allowed the pension pot to be passed onto beneficiaries and in many cases without liability to UK inheritance tax.
Now, with the UK – along with other countries – looking in every nook and cranny to find supplemental tax money, the Treasury has decided it’s time to allow people with UK-based pensions to cash out once they reach retirement age. Whilst this allows everyone the chance to use their retirement money the way they choose, they will be taxed on it.
Right now, though, it is unclear what tax rates will be applied, how the system will work and what the future holds for future off-shore pensions. In July, the UK government published its finding after consultation but left many questions unanswered pending its Autumn Statement on 3rd December.
Not only that, but there was hardly a mention in the July document about any alterations to opening offshore pension schemes, such as QROPS. As it stands, it is unclear whether to expect an outright ban on overseas pension transfers; whether such transfers will be taxed; whether any special restrictions will be imposed; or even whether the status quo will prevail.
As the new UK pension system is due to be implemented on 6th April 2015, it seems likely that, whatever happens to offshore schemes, it will happen on that date. So, if you’re considering transferring offshore, it may be worth exploring the possibilities sooner rather than too late.
Ask an expert
As you can see, the new reality for non-residents with financial interests in the UK is pretty cloudy right now. Judging what is best for your personal situation is far from straightforward. The Autumn Statement in December should provide some clarity but leaving matters until then may be too late. It may well be worthwhile getting a second opinion from an independent pension expert.
Footnotes:
1 https://www.gov.uk/government/consultations/restricting-
non-residents-entitlement-to-the-uk-personal-allowance
/restricting-non-residents-entitlement-to-the-uk-personal-allowance
2 HM Treasury White Paper: Freedom and choice in Pensions,
March 2014, https://www.gov.uk/government/uploads/system
/uploads/attachment_data/file/294795/freedom_and_choice
_in_pensions_web_210314.pdf
3 HM Treasury White Paper: Freedom and choice in Pensions:
government response to the consultation, July 2014,
https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/332714/pensions_response_online.pdf
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