The clock is ticking down for retirement savers who want to maximise their pension contributions.
This is a crucial tax year for pension savers as pension investment limits decrease from April 6, 2014.
Retirement savers can stash £50,000 away in contributions this year – and benefit from tax relief at their highest marginal rate, which is probably 40% or more for contributions that high.
That’s a bumper free top-up of £20,000 offered by the tax man.
However, the limit drops £10,000 to £40,000 in the next tax year – which is a 20% decrease.
Time is running out
At the same time, the lifetime allowance falls to £1.25 million. The lifetime allowance is the total amount of money any saver can keep tied up in a pension before tax penalties are applied.
For expats and international workers, this is a unique opportunity to smash and grab the UK pension regime.
Undoubtedly the lifetime allowance will keep falling and the government is whispering about cutting tax relief on pension contributions attracting higher rate tax in the future – and even capping tax-free lump sum pay outs.
All these proposals are aimed at reducing an individual’s chance to drain the state of cash in retirement.
However, the smash and grab tactic for expats and international workers involves dumping as much cash as possible in a pension before April to gain that £20,000 tax relief top-up – and then switch the fund to a Qualifying Recognised Overseas Pension Scheme (QROPS) that is beyond the tinkering of the British government.
As QROPS are recognised pensions, retirement savers who are non-resident can transfer their UK pensions into one of the 3,000 plus offshore schemes and take any tax-relieved contributions with them.
Once the pension fund is safely tucked into a QROPS, the fund grows free of capital gains tax and payments are subject to income tax in the country where the expat or international worker is resident.
The fund can also continue to receive contributions without the restriction of the lifetime allowance, but the saver cannot claim pension contribution relief as they no longer reside in the UK.
QROPS are a similar set up to an onshore self-invested pension plan (SiPP), but offer a wider range of investments in equities and commodities.
Many QROPS have tax-free lump sums of up to 30%, which is a bonus compared to the UK maximum of 25% – and politicians are even thinking about capping that at a lower figure.