Under the upcoming changes to the Finance Bill, which is currently navigating its way through Parliament, savers could see a significant hike in the amount of tax-free cash they can withdraw from their pensions. The key to this development lies in a quirk of legislation linked to overseas retirement savings, The Telegraph reports.
How Much Can You Save?
At present, when someone turns 55, they can take up to £268,275 tax-free from their pension. However, with the new rules, this amount could effectively double to a staggering £536,550. This boost comes from the ability to withdraw a 25% tax-free lump sum not only from a UK-registered pension scheme but also from a qualifying recognised overseas pension scheme (QROPS).
The Role of QROPS
QROPS were introduced by the Treasury in 2006 to aid British workers moving abroad. These schemes allow individuals to save for retirement while enjoying protection from British taxes on capital gains. An example is the Bank of Ireland Staff Pensions Fund, a QROPS, which safeguards funds from British capital gains taxes.
Implications for Savers
Wealth manager Jon Greer predicts a surge in transfers to foreign pension schemes due to this new incentive. He points out that individuals, regardless of their plans to leave the UK, could find transferring to a QROPS financially advantageous due to the substantial tax benefits.
New Rules Coming Soon
The Finance Bill is expected to receive royal assent in the coming weeks, with the new rules slated to take effect at the start of the new tax year on April 6. Under these draft laws, savers will have an “overseas transfer allowance” of £1.073 million. Any transfers beyond this threshold could face a 25% tax rate.
Doubling the Tax-Free Benefit
Broker expert Rachel Vahey notes that the overseas transfer allowance is distinct from the lump sum and death benefit allowances. This separation means that savers could potentially take their full tax-free cash from both a UK pension and a transferred overseas pension.
Warnings from Experts
However, this enticing prospect isn’t without risks. A surge in interest in overseas pension transfers could open the gates for potential scammers. The sector has already seen a decline in transfers due to heightened regulation and scamming activities. Jon Greer warns that scammers are always looking for loopholes to exploit, and this change in rules gives them a new opportunity.
Complexity and Advice
Rachel Vahey also stresses the complexity of overseas transfers. She urges anyone considering this move to seek regulated financial advice. She highlights the need for a comprehensive financial plan, especially considering the implications for inheritance tax, as moving money out of a pension could shift it into an individual’s taxable estate.
A spokesperson for HMRC confirmed that post-April 6, lump sums paid by UK registered schemes would be considered separately from those paid by overseas schemes.
In summary, while this loophole presents a potentially lucrative opportunity for savers to double their tax-free pension withdrawals, it’s crucial to approach with caution. Seeking expert advice and being wary of potential scams are essential steps.