The Daily Telegraph - Saturday - Money
Pension Doctor
The lifetime allowance has been frozen – but some savers have ‘protections’ to keep more of their cash from the taxman
QAfterjoining the Royal Navy straight from school in 1974 I went on to build a successful engineering business that conducted business in the UK and overseas from our south London base, including in Costa Rica and Panama.
In February 2018 I gained temporary Panamanian residency, which was fully awarded in July 2018. Unfortunately, I suffered a stroke in Panama in March 2018 and returned to London for treatment. Once recovered, I returned to Central America to mentor engineering undergraduates and since then, I’ve been unable to travel back to London due to the pandemic.
I have a UK pension with a protected lifetime allowance of £ 1.5m, which is currently valued at around £2.3m. I have not touched my pension. After reading several media stories about the lifetime allowance, I’m a wee bit concerned. – Larry K, via email AI’m
assuming that you are concerned about the recent Government announcement that the standard lifetime allowance will be frozen at £1,073,100 until 5 April 2026. In addition, there have been rumours that the lifetime allowance could be cut further to £900,000 or even £800,000 as one of a number of measures aimed at addressing the UK’s budget deficit.
The good news is that as you have a protected personal lifetime allowance of £1.5m, this freeze, and any further reduction, will have no impact on your pension benefits.
LIFETIME ALLOWANCE PROTECTIONS The lifetime allowance was introduced in April 2006, initially at £1.5m, and reached a height of £1.8m in 2012, but it has been steadily cut back to its lowest point of £1m in April 2016. Since then and until recently it has been increased in line with the September Consumer Price Index measure of inflation.
Those who save too much face tax charges on excess benefits. To mitigate this, HM Revenue & Customs brought in rules enabling people who have
built up ( or may build up) funds in excess of the lifetime allowance to apply for protection. There are several different types relating to various cuts, and I am guessing you have “Fixed Protection 2014”, given the level of your personal lifetime allowance.
As you have a protected personal lifetime allowance of £1.5m, the standard lifetime allowance doesn’t apply to you. You should have an HMRC certificate confirming this is your personal lifetime allowance. This means you will be able to withdraw up to £1.5m without being liable for a tax charge. However, as your total pension assets are worth around £2.3m, a tax charge will be payable, but only when you take the excess above your personal lifetime allowance.
Note too that the maximum tax-free lump sum you will be able to take will be limited to 25pc of your protected allowance.
There are also circumstances where you could lose your allowance.
PAYMENT OF PENSIONS ABROAD If you intend to retire abroad, how benefits are paid to you will depend on the scheme rules and your UK pension provider. It may be possible for payments to be made to a UK bank account or to an account you hold overseas. Investigate your options and remember that tax rates, exchange rates and bank transaction costs could affect the amount of money you actually receive.
In the UK, pensions are taxed as earned income under the PAYE system. However, you may be liable for tax in Central America, which means you could end up paying tax twice, unless there is a double taxation agreement. If you are intending to leave the UK permanently and become a resident in Central America, consider transferring your pension overseas. This is a really complicated area, and one where you would benefit from the help of a specialist financial adviser.
Before you do this you need to be aware of the HMRC rules on overseas transfers, which categorise these as recognised or non-recognised transfers. Recognised transfers are transfers to Qualifying Recognised Overseas Pension Schemes. The intention is that anyone who leaves the UK and transfers their pension savings overseas should be in much the same financial position as someone who remains in the UK with their pension savings. HMRC publishes a list of approved schemes which is updated frequently. It’s important you do your own due diligence on the status of the overseas scheme, as the situation could change. There are currently no schemes in Costa Rica or Panama on HMRC’s approved list.
It’s worth mentioning that overseas transfers are tested against your lifetime allowance at the point of transfer. As your funds exceed your protected personal lifetime allowance, a 25pc tax charge would be applied to the excess funds. In addition, an overseas transfer charge of 25pc of the fund value may apply in certain circumstances, such as if you are not resident in the same country as the QROPS was established.
Finally, a transfer from a UK scheme to an overseas scheme that isn’t a QROPS or a registered scheme is deemed by HMRC to be a “non-recognised transfer” and would be taxed as an unauthorised payment. Many UK pension schemes would refuse to make the pension transfer.