UK private pensions. Big changes coming!

World financial markets drifted lower again recently. (And Brexit will not help matters)

If only statements like this could sum up the feeling of opening your investment portfolio statement and seeing all the figures in red. Unfortunately they don't (not when I opened mine, anyway).  But, in times like these I always refer back to my books on financial markets which help to ground me and not allow me to get carried away with the despairing media messages. One of my favourite books is 'Extraordinary Popular Delusions and the Madness of Crowds' written by Charles MacKay and first published in 1841. 

It is a great look into the human mind and how we can get carried away with a 'mob' mentality and easily forget the fundamental principles of why we are doing something. The first 2 chapters in the book look at The Mississippi Scheme and The South Sea Bubble of 1719 to 1720. 

What is amazing is that the experiences of the 18th century are no different to those of today. If you think that excess debt will lead to financial collapse and that we will never recover from this, then read the book. You will see that in both cases debt was created, just as it is today, on a huge scale, and that after the crash life went on and markets recovered.  

The book is more a look at the behaviour of people during these periods and how you can easily get distracted by the masses. Here's a direct quote: 

"Men were no longer satisfied with the slow but sure profits of cautious industry.  The hope of boundless wealth for the morrow made them heedless and extravagant for today". 

So on that note, I will leave the subject of rampant financial markets to another time. At The Spectrum IFA Group we promote and actively encourage a 'cautious approach' to any investment. Understanding your own circumstances and time horizons and then planning carefully around them is the most important and fundamental aspect of financial planning.   There will be bumps in the road (when aren't there?) but a good plan should always be stuck to. 

So, onto the main theme of this weeks Blog. UK Pensions!

If you have ever lived and worked in the UK, then you may very well be the holder of a UK private pension (for the purposes of clarity this article does not concern the UK state pension or anyone with a pension from a Governmental agency in the UK, e.g Teacher, local authority pension, Doctor etc).

You may or may not be aware that in March 2016 the UK Government will be announcing 'sweeping changes' (in its own words) to the way pensions are treated in the UK. This follows the move last year to allow holders of UK pensions more freedom to spend their retirement money in the way that they wish by allowing them total access to their private pension funds. This has been lauded as a huge step in making pension regulation much lighter and easier to understand whilst giving individuals more control over their futures. And of course, let's not forget that it was also a good way to make additional tax revenue for the UK (just when it needs it!). So it was not all one sided generosity!

The next step in this reform is to tackle the even bigger problem of the cost of UK pensions to the UK Government.  

The current state of affairs is such that any eligible contributions you can make to a UK pension attract tax relief at your highest rate of income tax, ranging from 20% to 45%. So for a higher earner, earning over £150,000 pa, for every £65 you contribute to the pension, £45 will be added by the Government as tax relief (the exact figures are a little more complicated but it gives you the basic idea). 

When you eventually take your pension, from age 55 onwards, the UK Government taxes you on this pension as normal income. So in effect they are creating a system of No tax/tax relief at one end and income tax at the other. 

That would seem to make sense, except when you look at the figures. 

The UK Government currently pays out approx £38 billion each year in tax reliefs, (30% of which go to higher rate taxpayers).  

However, the UK Government only takes in approx £23 billion each year in tax revenue from people in retirement/people accessing their pensions. That is an annual shortfall of £12 billion a year in UK tax revenue, that could be redirected towards the NHS, infrastructure, care services etc. Money that the UK desperately needs. 

So something will be done in the March 2016 budget. The Chancellor has already stated that sweeping changes will be made and we will have to see what those might be. 

Some ideas are that pension tax relief for higher rate taxpayers will be almost abolished (which doesn't seem such a bad thing). He could also introduce a flat rate of tax relief for everyone, regardless of income, the figures 25% or 33% are being bounded about.  The latest is that the 25% tax free lump sum option will be abolished. 

He could even take more drastic measures and remove tax reliefs altogether, and at the same time make pension payments tax free. This would sound nice on the face of it, but what about those of us who have pensions in the UK and have received pension tax relief at source already. Well here is where things get a little more complicated. Discussion surrounding an across the board, 20% reduction in pension funds is also being held. It would represent a repayment of pension tax relief back to the UK exchequer. This would affect a lot of people either saving for retirement or who are currently living from their retirement savings.  

This is a drastic solution but one which could win favour amongst the populous, knowing that they do not have to pay taxes when in retirement. And more importantly it would mean a direct saving of £12bn a year for the UK exchequer.

For anyone in Italy with a UK pension the tax treatment would be considerably less favourable since ALL private pension income is taxed in Italy.  So any reduction in the value of your fund would represent a true fall in the amount of income!

However, solutions are always at hand. It has been possible for UK pensions holders who are no longer working or living in the UK or who have an intention to leave, to move their UK pension away from the UK and to, effectively, secure their pension fund in a more liberal tax jurisdiction where UK legislation changes will no longer have any bearing on the pension fund itself. These funds are known as QROPS: Qualified Recognised Overseas pension schemes. 

For residents of Italy that safe jurisdiction inside the EU would be Malta.  

Since the start of this year, QROPS transfers are now available for anyone who has a pension pot from £20,000 upwards.  

And before we forget, an equally important consideration to transfer your pension fund away from the UK into a safe jurisdiction inside the EU would be the potentially 'negative' result of the BREXIT vote. What would happen to holders of UK pensions living inside the EU if the UK votes to leave?

Sensible financial planning is about securing that which you have worked hard to achieve and making sure it is there for you in the future. There are a few weeks until the March budget and a bit more time until April 6th when any changes will likely be put into effect. The BREXIT vote looks likely to be held in June 2016. Time is of the essence!

If you have UK private pension and it is either frozen, being paid into or you are taking pension withdrawals from it, and you think that you could be adversely affected by the future legislation changes then you can contact me on gareth.horsfall#spectrum-ifa.com or call me on +39 3336492356.  Equally, if you think anyone you know may be affected do not hesitate to forward this article to them or pass my details onto them.