Isle of Man Pension Consultation

New Isle of Man Pensions Consultation

In the UK, Personal Pension holders enjoy Pensions Freedom (whereby anyone with a U.K. Personal Pension has the ability to take all or part of it at any time from age 55). At present this freedom is not available for Isle of Man Personal Pension holders.

The Isle of Man Government have now released a consultation paper proposing a new type of Personal Pension to sit alongside the existing pension and proposals for Manx Personal Pension holders to convert their existing pensions to a new style pension, which would give them the ability to withdraw their pension at times of their choosing.

The present situation

a) Isle of Man Personal Pensions 

Pension savers can currently pay an unlimited amount from their earned income into an Isle of Man pension scheme and receive tax relief at their marginal tax rate up to contributions of £300,000 per year.

Individuals choosing to take their pension via a pension drawdown from an Isle of Man pension can take 30% tax free from their total pension savings, but are restricted to taking an income (taxed at their marginal tax rates), restricted to 150% of the UK Government’s Actuary Rate (GAD). In practice this means that at this time:

  • A 60-year old would be able to withdraw up to 6.3% of the remaining pension pot each year, i.e. £6,300 per year from a £100,000 pension pot.
  • A 70-year old would be able to withdraw up to 8.7% of the remaining pension pot each year, i.e. £8,700 per year from a £100,000 pension pot.

Funds retained in a pension scheme may attract pension fees, which can be substantial.Following pensions freedom in the UK the Isle of Man Government is considering offering both a new style pension and the ability to transfer an existing Isle of Man pension or a UK Personal Pension into the new flexible pension.

b) UK Personal Pensions

Some employees of Manx companies have UK Occupational Personal Pensions. When these pensions are drawn, the employee is entitled to a 25% tax-free lump sum cash payment.

Where individuals have UK Personal Pensions, (accumulated during a time working either in the UK or the Isle of Man), they also receive a 25% tax-free lump sum cash payment. In some instances, the pension may not have received employer contributions. However, in these cases the Isle of Man Government tax it at the individual’s marginal tax rate, normally at 20% in the year it is taken even if no Manx tax relief of pension contributions was given.

The new style pension

Our understanding is that the new style pension can sit aside the existing one. Comparing the two:

 

Existing

New Style

Tax relief allowed

On up to £300,000 per year

Up to the first £5,000 per year

Tax relief given

Up to the marginal tax rate (0-20%)

10%

Tax upon drawing

Up to the marginal tax rate (0-20%)

10%

Tax Free Cash

30%

40%

Eligibility for Drawdown

Age 50

Age 55

Upper age to start drawing

75

No restriction

Tax on remainder on death

71/2%

Nil

Flexibility

Restricted to 150% of GAD

No Limits

Our views:

  • We feel the amount of £5000 per year is far too small. If you were able to save this amount from your income for 30 years then at a real rate of return (after inflation) of 4% and after 10% tax relief, you would save a total of just over £319,000. This sounds a large figure but taking 40% tax-free cash would leave you with £191,400. Drawing 4% per year would only amount to a pension of £6,890 per year after tax at 10%
  • The pension provider will need to charge a fee and this will at least partially reduce the benefit of the 10% tax relief. If current charges of circa £400 per year are imposed, then this would be a serious impediment to adoption of the pension

An alternative proposal:

  • Increase the maximum amount substantially or remove it altogether
  • Increase tax relief to 30%, retain the current tax-free lump sum of 30% as for the existing pension, tax withdrawals at 30% (once personal allowances and the lower-rate tax ban has been used)

Adopting the above proposals would allow a meaningful amount to be saved. It is essential to commence pension saving at a young age, which is often difficult with family commitments. Providing higher tax relief of perhaps 30% provides an incentive to save and provides the opportunity to build a larger pension pot sooner to take advantage of investment growth. Paying a higher tax rate later, despite lack of earned income comes at a time when the mortgage should be paid off and family living costs become lower.

The transfer option

In the consultation views are being asked about a scheme to transfer existing Isle of Man Personal Pensions into a Pensions Freedom scheme.

Comparing transfer with the existing scheme:

 

Existing Scheme

New Scheme

Government Fee Payable to Transfer

Not Applicable

15% Proposed

Tax Free Cash

30%

40%

Tax on remainder

At marginal tax rates

10%

Flexibility

Restricted to 150% of GAD

No limits

Our views:

  • Whilst the new scheme seems appealing on the surface, if a 15% fee were imposed, then there would be a significant increase in tax payable for the benefit of pension flexibility. This is because the 40% tax-free cash comes from the net amount transferred to the new pension.
  • The percentage tax payable may vary markedly depending upon a combination of when the pension is drawn and the level of “other” income the taxpayer enjoys.
  • The proposal does nothing to address the inequity for the majority of Manx residents with UK Personal Pensions having to suffer taxation of their “tax-free” cash on retirement, as opposed to those holding UK Occupational Pensions who do benefit from a 25% tax-free lump sum

An alternative proposal:

Any proposal to allow pension freedom must allow the flexibility to draw down as required. A solution need to put in balance a number of factors:

  • Pension freedom presents the risk that individuals take all their pension at once, which in the longer term risks the state having to look after the individual’s welfare if they run out of money
  • The ongoing cost to the individual paying pension fees if they have to retain a pension
  • The fact that the UK has pension freedom and a potential disincentive to UK residents moving here into a constrained system.

 An alternative and simple proposition might be to allow pension freedom, restricting tax-free cash to 25% as in the UK, taxing drawdowns at marginal rates. In this way pensioners have an incentive to use personal allowances and their lower tax rate band to retain a pension for the future.

Survey

We believe it is important that all our clients are aware that a consultation is taking place and that they may register their views.

Below is a survey, incorporating a form of the questions presented in the Government’s consultation paper. If you would like to complete the survey, which will be compiled anonymously, then we will forward this to the Government.

You can see a copy of the Government’s consultation paper here:

Treasury pension consultation 18 July 2017

 Please be aware that responses must be received by The Treasury by Friday 15 September.

https://www.surveymonkey.com/r/DPCGGP7 If you wish to you can provide a response very quickly and anonymously to the survey by answering the 7 questions appearing in our survey. Please feel free to provide any additional feedback to us by email to advice@chasewealth.im