Pension Flexibility at 55

In 2015 the UK government introduced a rule that anyone with a UK personal pension could access their whole fund at age 55 – this is known as ‘pension flexibility’.  Prior to this, only a 25% tax free lump sum could have been taken and the balance of the fund had to provide some form of income, either by way of purchasing an annuity or taking drawdowns from the fund.  The 2015 legislation means that 100% can now be withdrawn as a lump sum.  However, 75% of it is taxable at the member’s marginal rate.

Those of us providing expert advice on the pros and cons of transferring UK pensions, have been patiently waiting since then for this rule apply to Recognised Overseas Pensions Schemes (ROPS), where UK pension fund money has already been transferred to a ROPS.

On 9th March 2017, the UK Chancellor announced this rule can now apply to ROPS and so providers and advisers have been gearing up to provide the advice clients need.

So, what does this mean for anyone with a ROPS who is aged 55 and over?

It means that we can now look to potentially withdraw your total ROPS fund.  There are a few caveats to this of course, so we will attempt to explain the detail.

Up until now, anyone with UK pension funds in a ROPS, has been able to take between 25%-30% of their fund at age 55, with the balance having to provide an ‘income for life’ – like the old UK rules before 2015.

For clients who have already transferred their UK pension funds to a ROPS, we can now check if the ROPS provider has amended the Superannuation Scheme Trust Deed, to allow full access to the member’s fund from age 55.  Some have amended their Deed whilst others have set up a new ROPS, to allow this ‘pension flexibility’ option.

The ROPS may have penalties for withdrawing the whole fund at age 55, particularly if the transferred funds have only just arrived from the UK, and this is understandable.  It takes a lot of time, effort and expertise to set-up, run and monitor a ROPS from a provider’s perspective.  It is therefore not fair if a client were to use the provider’s scheme just as a conduit to transfer their UK pension funds to the scheme, only to immediately cash it in, when there is a lot of administration, costs and compliance involved.  Penalties differ between providers and so it is important that these are considered.

It does mean however, that for those over age 55 access to the whole fund will allow the release of funds previously tied in for life, to be used for other retirement planning goals and to help reduce a layer of costs that are part of the ROPS process.

Encashing your UK Pension at age 55 – instead of transferring to a ROPS

One area of advice we provide, is to consider whether someone who is already aged 55 and over would be best to encash their UK pension whilst it is still in the UK, rather than transfer to a ROPS.

The advice is purely on a client by client basis as everyone’s circumstances are different.  However, from a general perspective, if the client is a non-UK tax resident and is living and residing here in New Zealand for example, it is important to weigh up the process of encashing the pension in the UK, potentially paying any emergency tax (40%) on the 75% balance of the fund (after the 25% tax free lump sum), and then reclaim or offsett the tax paid against any tax liability due here.

With this process, the money is no longer in a pension product so the cash balance can provide flexibility going forward depending on the individual’s circumstances

If a transfer were to proceed without this advice, the client would potentially be setting up a ROPS here in New Zealand, paying some advisers up to 5% of the transfer value for just organising the transfer (some without advice I might add!) and paying fees associated with the ROPS product.

The client’s tax position also needs to be taken in consideration.  For example, if they are a transitional resident in New Zealand for tax purposes, there would be no tax to pay in New Zealand on worldwide income for their first 4 years of residing in NZ.  Criteria applies to meeting the transitional residency test which I won’t go into here, however, advice on encashing or transfer during or after this 4 year period is very worthwhile obtaining.

Important Points

  • It is vital that anyone, especially those 55 years and over, with a UK pension still in the UKor anyone with a ROPS which has been established from a previous pension transfer, seek independent advice. Ideally your personal financial situation should be taken in consideration and advice tailored to what is in your longer term best interest sought
  • Remember, the pension ‘pot’ was established to help build wealth for your retirement years, to provide a passive income when you choose to stop earning through work. If the ‘pot’ is encashed and spent, nothing will be left to support the retirement years and you will need to ask yourself “how am I going to replace what I have just spent, especially now I am getting closer to those retirement years?”
  • When it is in a client’s best interest to fully encash the pension from age 55 onwards, we encourage our clients to still ‘earmark’ the funds as their retirement ‘pot’ and reinvest the money. Reinvesting it just means placing the funds into an appropriate investment portfolio (that may match what they had in the ROPS), but outside of the ROPS product itself.  This means the money is no-longer subject to UK HMRC legislation and is no longer a Superannuation fund here in NZ, saving on fees and protecting it from any future legislation rulings – it is now a totally separate investment fund
  • Of course, some clients may wish to use some of the encashed funds to repay mortgages early and this may be best advice. If the client is still working however, the advantages and disadvantages need to be considered.  Perhaps redirecting the monthly mortgage payments that are no longer needed, to a regular savings plan would be a smart move to continue to build wealth

This new ‘pension flexibility’ rule does NOT mean that one size fits all and every angle needs to be considered.  It is important to understand your choices and learn whatever is going to be in your best interest.  Therefore, although we are bias of course, we believe professional independent financial planning advice is crucial, so that you can make an informed decision having been presented with all the facts and options.

Please do be prepared to pay for this expert advice.  Just like we engage medical specialists, architects, engineers, lawyers, accountants and any business whose services we require, quality impartial financial planning and UK pension advice should be paid for too.

Charlene Overell – G3 Financial Freedom Ltd