British Expats in USA and the 2015 Pension Changes
by Alexander Beard, on Sep 4, 2014 5:15:42 PM
In April 2015, new legislation will come into force that will affect a large percentage of people who have a UK Pension. These new rules will provide greater flexibility and freedom than was previously afforded to pension holders and will apply to many British expatriates and Americans who have built up pension rights in the UK.
With more and more company pensions being closed to new entrants, and some being transferred to defined contribution schemes, an increasing number of people will be affected by this new legislation.
Although there are numerous changes that began in April this year, and more due for next year, this article will focus on three of the most significant of these.
- Ability to withdraw 100% of your defined contribution fund upon retirement
- Reduction or removal of the 55% ‘death tax’ rules for defined contribution schemes
- A ban on transfers from unfunded defined benefit to defined contribution plans
The first major change will come in the form of how individuals take their income from a defined contribution scheme (personal pension). Currently, the two main income options available at retirement are purchasing an annuity or utilising a capped income drawdown facility.
Historically, the most common option has been that of purchasing an annuity. An annuity is purchased from an insurance company with your pension fund and in return you receive a secure income for life. However, British expatriates who are now US residents or citizens are finding this option increasingly difficult to access, due to the majority of UK providers no longer accepting US residents.
With the capped drawdown option, you can withdraw an income from your pension up to a maximum prescribed limit set by the UK Government. This allows the funds to remain invested, whilst you still take an income. This maximum limit will not apply from April 2015. Individuals will be permitted to take as much income as they like, or should they wish, they can withdraw the whole pot in one go. Although this provides greater financial freedom, there are many considerations to be aware of, for example, taking excessive income will erode your pension pot much sooner.
The tax treatment of these new measures still allow you to take 25% as a tax free lump sum, with the remainder being taxed at your marginal rate. This could push you into the higher rate tax band of 40% or even the 45% bracket, therefore prudent financial planning will be necessary to mitigate this.
UK pensions may currently be accessed from the age of 55. The minimum age limit for 401k and IRA retirement plans is 59 & a half, without incurring a 10% tax penalty. Therefore, you may begin to receive your UK income 4 & a half years sooner than your US retirement income. However, the minimum age for drawing a UK pension will be increased to 57 from 2028.
The next major change relates to the amount of tax that is due when you leave your pension fund to your loved ones, after passing. Currently, if you die before you take an income from your pension the whole pot can be passed to your beneficiaries as a tax free lump sum.
However, if you die after being in receipt of your pension, or after the age of 75, a 55% tax charge is levied on the entire pot before it is paid to your beneficiaries. The Chancellor has confirmed that this is now going to be scrapped from April 2015. This outcome will have a major impact for many who wish to leave their loved ones a sizeable asset after they are gone.
Finally, anybody with a company pension (defined benefit scheme) could take advantage of these new flexible withdrawal features but will need to transfer into a defined contribution plan beforehand. This is something that requires careful consideration as you will be giving up the benefits provided by the company scheme and as such will require independent financial advice. Transfers from unfunded public sector pensions will be banned from April 2015; this includes, but is not exclusive to, NHS, Teachers and Armed Forces’ pensions.
British expatriates face numerous challenges when they move abroad, most notably their cross border financial circumstances. The majority of people tend to leave some of their UK assets behind and inevitably begin to build up assets in the new country they now call home. The difficulty can be in organising your finances in such a way that they meet both the UK and US rules, whilst effectively managing your investments; this is where we can help.
At Alexander Beard, we specialise in assisting expatriates globally with offices in all corners of the world. Clients receive the added benefit that our company is registered and regulated in both of the jurisdictions that you have an interest in, meaning we can assist you with your assets and financial planning.
We continue to develop and market our UK/US cross border services to help meet your needs. This includes the creation of a pension plan solution that is specifically designed for British expatriates now living in the US and, as a result, we are delighted to introduce AMVEST. This pension plan removes foreign exchange risk, as you may hold your funds in GBP and convert into USD, at a time when it is more favourable to do so. Our AMVEST personal pension will also be incorporating the withdrawal flexibility of the new rules from April 2015.
Please feel free to contact me, if you would like to learn more about these changes or would like some assistance with any other financial matters in the US or UK. My email address is firstname.lastname@example.org
Please note that investments can go down as well as up and that Alexander Beard are not tax advisers. Tax advice is not regulated by the Financial Conduct Authority.