Pension Update March 2016
Following the Pension Freedoms that were introduced for UK pensions last year, we were eagerly awaiting any announcements in the Manx Budget which would provide equivalent freedoms for Isle of Man pensions. Full pension freedoms were not introduced however there were some changes that will improve access to pensions for some people.
Firstly, Trivial Commutation (ie where you can take a smaller pension(s) in full as a lump sum) previously permitted individuals aged 60 or over to access a pension(s) up to a maximum of £30,000 as a lump sum. This limit has now been increased to £50,000 and is available for those aged 55 or over. 30% of any trivial commutation lump sum will be tax free, with the remainder subject to income tax.
Secondly, the limits which apply to the Withdrawal of Funds regulations were also improved. The Withdrawal of Funds regulations (also known as Remnant Funds) were introduced last year to allow individuals, aged 60 or over with Isle of Man Self Invested Personal Pensions (SIPPs) to withdraw the full value of the pension if, after tax free cash had been taken, it was less than £30,000. The limit for Withdrawal of Funds has now also been increased to £50,000 and the age limit reduced to 55. Any pension taken under these rules is taxed as income.
Isle of Man Tax Treatment of UK pensions
Isle of Man residents who are over 55 can benefit from the pension freedoms on their UK pensions although unfortunately the 25% “tax-free” cash or pension commencement lump sum as it is technically known, may not be tax-free. If you have a UK personal pension plan the gross value of any amounts drawn will be treated as taxable income in the Isle of Man.
On the other hand those in UK Occupational Pension Schemes will, by concession, be able to draw their pension commencement lump sum as a tax free sum.
If you want to take advantage of the new pension freedom and start taking your pension then you could theoretically:
- Start drawing up to 100% of your UK pension (providing the UK scheme allows flexible access) and pay Isle of Man Income Tax on any monies you receive each year which exceed your personal allowance / joint personal allowances.
- Alternatively, you can move your UK Pension to an Isle of Man Self Invested Personal Pension Plan (SIPP); take 30% in cash which would not be taxed and then draw down the balance over a number of years as used to be the case in the UK / or buy an annuity with the balance.
UK tax deducted at source on UK pension income
If you do use the pension freedoms for your UK pensions, the pension provider will deduct UK tax when it is paid. You then have to reclaim it from HMRC and then declare the full amount received to the Isle of Man Authorities who will then assess the whole amount for Isle of Man income tax.