Any contributions made attract tax relief at the owner’s marginal tax rate
As of April 2010, the maximum combined pension fund of any one person must not exceed £1.8 million
Civil Servants are exempt from these rules</li></li></ul><li>Taking Money From Your Pension<br /><ul><li>All Personal Pensions allow Individuals to take a Tax Free Lump sum at age 55 as well as an Income.
Present rules allow a Pensioner to draw down on their pension at 120% of GAD up to age 75.
At age 75, pensioners are required to purchase an annuity or seek an alternatively secured pension. </li></li></ul><li>Annuities<br />With people living longer than ever before annuity rates have declined substantially over the last 50 years.<br />Example<br />60 Year old non-smoking male purchasing an annuity will receive an income of 3.6%. Upon death the annuity holder’s wife will be entitled to a 50% pension (1.8%). After the spouse’s death the entire pension sum will be forfeited to the life company who sold the annuity.<br />The main problem with annuities is their expensive nature. It is relatively easy to see that even in a bank account it is not too difficult to beat a return of 3.6% per annum without touching the capital.<br />
Tax Implications<br /><ul><li>All UK pensions attract tax relief at a person’s marginal tax rate.
For a UK Income tax payer, 20% will be automatically added to any contribution and a further 20% can be reclaimed by higher rate tax payers on their annual tax return.
Income drawn from a pension either through an annuity or from a draw down will attract an income tax charge.
Depending on double taxation agreements, income tax paid on pension income may be reclaimed for tax residents of certain countries.</li></ul>Tax Free<br /><ul><li>Malaysia
Indonesia</li></li></ul><li>Tax Implications<br />Inheritance Tax<br />If the member of the pension dies before age 75 and before they have begun drawing an income, the pension funds will be free of Inheritance Tax as long as the beneficiaries are named on the pension. Otherwise the pension funds will be added to the member’s estate and liable to IHT.<br />If the member dies before the age of 75 but after they begin drawing benefits, then the fund will be subject to a special income tax of 35%.<br />If a member dies after the age of 75 and has opted not to purchase an annuity, then the fund will be subject to a special 55% tax charge. The remaining fund will then be liable to Inheritance Tax at 40%. This means that the beneficiaries will only receive 18% of any funds. The equates to a tax of up to 82% on the fund.<br />
Investment Choices<br /><ul><li>Many Investors have been disappointed by the returns in their pensions over the past 10 years.
Since the year 2000, pension fund managers have been required to hold a minimum of 40% of their assets in UK Government Bonds.
While this has been a massive boost for the Treasury giving the government a large captive market to borrow from, it has reduced returns in pensions funds dramatically.
On average over the last 5 years UK pension fund managers have managed a real return of just 3.5% per annum.</li></ul>Investment Choice: SIPPs<br /><ul><li>SIPPs allow the holder or an appointed portfolio manager to hold any form of securitised assets inside the pension. </li></li></ul><li>Investment Choices<br />What can be held:<br /><ul><li>Equities
Fine Wines</li></li></ul><li>Final Salary Schemes<br /><ul><li>Final Salary Schemes pay a percentage of a person’s final salary from a company as an income for life.
The pension funds paid by both the employee and employer belong to the employer and the employer is entitled to use any surplus in the fund for its own use.
The employer is also responsible for making up any shortfall in the fund. However with a rapidly ageing population and relatively poor investment performance over the past decade, most final salary schemes have unsustainable shortfalls.
For example, British Airways pension shortfall is larger than the entire stock market value of the company.
In the event that the employer becomes bankrupt the pension fund may collapse. In this event the Pension Protection Fund will step in. The maximum compensation for pensioners is 90% and up to a maximum cap of £30,856.
The Pension Protection fund is not government funded and relies on other final salary pension schemes paying a levy to bail out the insolvent scheme.
In the event of a bad collapse, a chain reaction could strike the UK Pension system leading to the collapse of even well-funded pension funds.</li></li></ul><li>Best Advice<br /><ul><li>For someone who will return to the UK to retire and who has a pension fund worth more than £50,000 then a SIPP should be considered. The charges are lower than a QROPS and you have the ability to invest up to £255,000 a year and have the government add up to 40% to your contribution.
For anyone retiring outside the UK then a QROPS should be considered. The funds can be paid gross and are free of UK income tax anywhere in the world. Once you are outside the UK for 5 years the funds are removed from Inheritance Tax.
For anyone with a final salary scheme who wants to either take benefits early, make sure their family gets better death benefits, or who is worried that their former employer may become insolvent you should consider transferring to either a QROPS or UK SIPP.</li></li></ul><li>Caution<br /><ul><li>Many companies are offering pension transfers to places such as New Zealand. This is know as a QNUPS transfer (Qualifying Non UK Pension Schemes).
Many of these schemes offer to give you access to 100% of your money instantly.
This is a violation of the pension transfer conditions laid out by HMRC. If the UK revenue discover this they will take the funds back and deduct a 55% tax from the fund.</li>