While in the UK, we are set to witness a defining moment for the pension market in 2015 and beyond, for the international and expatriate market, the same is also true.
Traditional pension plans are set to be granted 100% access and flexibility in terms of drawdown, and while some predicted that this would affect the popularity of the Qualifying Recognised Overseas Pension Scheme (QROPS) market, industry experts maintained the scheme would eventually mirror the flexibility due to be introduced in the UK in April 2015.
A recent paper published by HMRC, gave little indication as to the future of QROPS, namely the flexible drawdown or the potential for the tax-free aspect of the lump sum to be reduced to the 25% offered in the UK, but based on the discussion during the consultation process with leading industry experts, it is widely expected that 100% access to QROPS will also be introduced in April alongside the UK changes.
With the abolishment of the requirement to buy an annuity, the Government were widely applauded for finally allowing a degree of flexibility into a tired and somewhat beleaguered pension model. When, in the same breath they gave savers 100% access to their savings upon retirement (25% lump sum tax free and remaining 75% at marginal tax rate), it created equal amount of surprise and concern in many quarters.
Freedom of choice is of course very much welcomed, however some prominent EU member states fear that allowing a pension to be accessed in its entirety may have a detrimental long term effect for the economy. Instead it has been argued that while maybe 50% could be made available upon retirement, a portion should be held back for investment purposes to guarantee an income for life.
As well as the lump sum option, savers can now choose to spread their bulk withdrawals over a period of years, effectively turning their pension fund into a bank account. The only subtle difference is that a bank account generally receives a top-up each month from an employer, a pension with this level of access tends to get eaten away with little or no rejunivation.
It is for this reason that many viewed an annuity as being a good solid option for the UK’s pensioners. Yes, the way in which the market was run needed updating and a lot more transparency, but a guarantee of an income for life could only be regarded as a good thing. By allowing 100% access upon retirement, a guaranteed income for life is set to become a thing of the past permanently.
In the QROPS world, up to 30% as a lump sum tax-free is already offered, and if and when the 100% access is extended to the overseas schemes, it will mean the remaining 70% could be made available at a tax rate which could potentially be as low as 2.5%.
Rather than diluting the appeal of QROPS, this legislative amendment will simply serve to broaden the appeal of an option which has escalated in popularity in the last 12 months, particularly in light of the public sector restrictions due to be imposed at the same time as the ’freedoms’ are afforded.
While on the face of it, 100% access may be appealing both in the UK and overseas, it is not necessarily suitable for all. Advice should be taken before any financial decision of this gravity is made, and personal circumstances should be considered in advance of retirement.