Autumn Statement 2016 introduced no further restrictions to the UK registered pension regime but that is only because more than enough meddling has taken place over recent years.
Gordon Brown commenced a decade of change in 2006 with the introduction of the lifetime and annual allowances. Both of these allowances essentially put a limit on the amount that any individual could save in to a UK registered pension scheme over their lifetime and during any particular tax year.
A flurry of pension reforms later and from April 2016 the lifetime allowance was reduced to £1.0m and the annual allowance reduced to £10,000 (for those ‘high earners’ earning over £210,000 per annum).
In the 2014-15 tax year pension tax relief is estimated to have cost the Government circa £50bn, with high earners the overwhelming recipients of this ‘generous’ relief. It is easy to see why successive Chancellors have restricted pension allowances in the way they have, in an attempt to cap the cost to the Government of providing this tax relief.
Documents released with the Autumn Statement contained subtle hints that tax relief on pension contributions could soon be scrapped altogether, at least for higher rate taxpayers.
One document noted that pension savings
“is one of the most expensive sets of reliefs offered by the Government” and added “The Government is committed to enabling individuals to save more, so that they have security in retirement, but it is important that resources focus where there is most need.”
The Government has restricted the amount that can be saved via UK registered pensions to such an extent that individuals with high levels of income now need to consider alternative “top-up” savings solutions to augment their UK pension provision. Even with a fully funded UK pension the income it will generate in future years will not provide anywhere near a replacement in retirement for the current high earnings they have become accustomed to.
Qualifying Non UK Pension Schemes (QNUPS) are increasingly filling the void, complementing UK pension products and acting as a secondary pot. Contributions may be made to the QNUPS by individuals out of their own post taxed resources, whether they are in employment or not and as those contributions do not attract UK income tax relief the restraints of the UK annual and lifetime allowances do not apply.
As a QNUPS is a pension scheme established and administered outside the UK (but which satisfies the requirements prescribed in the UK legislation) they work well as a tool for globally mobile high earners to hold their wealth in anticipation of retirement outside the UK.
There is no cap limiting the overall value to which assets held within a QNUPS can grow. Capital gains accruing within a QNUPS are not subject to UK capital gains tax, even if derived from the disposal of a UK sited asset. UK source income within a QNUPS will remain subject to UK income tax whilst the Member of the QNUPS is UK resident but this can be avoided by simply investing the QNUPS fund solely in non UK assets/shares etc.
Contributions of cash or assets made to a QNUPS are not transfers of value for Inheritance Tax (IHT) purposes as they are paid to secure retirement benefits, which can be drawn from age 50 onwards.
Where the Member of the QNUPS has permanently retired outside the UK prior to drawing pension payments from age 50 there should be no UK tax to pay on receipt of pension payments, however, the tax position in the jurisdiction the Member is now resident will need to be considered.
In the event of the Member’s death, any residual value remaining in the QNUPS can be used either to provide a survivor’s pension to spouse/other dependents or a lump sum death benefit payable to one or more beneficiaries. Alternatively, the residual value can be decanted to a separate Will Trust which could be structured with as many or as few conditions attached as the Member sees fit and could form the basis for a long term Family Trust for children/grandchildren
James is 45 and is employed in the City. He is UK resident and UK domiciled. He currently earns £500,000 gross income per annum. The value of his UK registered pension scheme is likely to reach his lifetime allowance limit well before he reaches retirement age.
James has £400,000 of cash savings in the bank and a recently purchased an unencumbered investment property in Portugal, earning him £30,000 in rental income. James intends to leave the UK permanently to retire with his family in Portugal at age 55.
James is concerned that his existing pension provision will not provide him with the level of income in retirement that he as become accustomed to and wants to consider alternative solutions to ‘top-up’ his retirement savings.
James should consider establishing a QNUPS using some or all of the £400,000 of savings he has. He can then make future contributions out of his surplus annual income going forward. The funds within the QNUPS will immediately be outside James’s estate for IHT and those funds could be invested in non UK sited investments/assets, so that income returns will ‘roll-up’ free from UK tax, thereby maximising the growth of the overall QNUPS fund.
James could also consider making an “in-specie” contribution of the Portuguese investment property to the QNUPS, unless he intends to live in it upon retirement in Portugal. The £30,000 rental income would then belong to the QNUPS and would not be subject to UK tax.
As an aside, James may also wish to consider transferring his UK registered pension plan to a separate type of non UK pension scheme called a QROPS. This will release that pension plan from the constraints of the UK lifetime allowance, meaning that the plan can grow above the lifetime allowance cap without incurring any future tax charges.
Upon retirement in Portugal it should be possible to arrange a highly tax-efficient retirement income from both the QNUPS and the QROPS.
If you would like to discuss this article, please contact Robert Astley, Family Office Services Consultant.
By Robert Astley, Family Office Services Director