Isle of Man Pension Freedoms
Isle of Man Pension Freedoms Scheme (PFS)
On 20th February 2018 the Isle of Man Finance Minister announced some important changes being put forward to update pension legislation on the Isle of Man. Similar to the pension freedoms introduced in the UK from 2015, the Isle of Man will legislate to develop a new type of pension which will be available from April 2018 and give Isle of Man residents more freedom and choice as to how much and when (subject to a minimum age) they can access their pension benefits.
A comparison of the current available pension structure and the new structure, called the Pension Freedom Scheme (or PFS for short), is outlined below:
The basic rules of the new scheme will be:
- Retirement will be from age 55 onwards with no upper age limit, which means that you never need to draw this pension. This compares to the current scheme where retirement can be from age 50 and benefits must start to be taken at age 75.
- Tax free cash of 40% will be available and, if taken, must be taken in full. This compares with a lower 30% in the current scheme, but this can be a little more flexible and does not have to be taken in full or all at once.
- The remainder of the pension fund can then be drawn as and when you want after age 55, even in its entirety, with your marginal rate of tax being applied to any amounts drawn. The current scheme limits access to the pension fund up to 150% of the Government Actuary’s Department (GAD) rates in the UK. The current scheme also stipulates that at age 75 you must take benefits, but this can be between 35% and 150% of GAD.
- The funds on death will not be taxed but have to be paid out within 2 years. In the current scheme there is also no tax if benefits have not been crystallised at the time of death, however there would be a 7.5% tax if benefits have been crystallised.
- The funds will grow free of direct taxation whilst in the scheme, which is the same under the current scheme.
“The term ‘Crystallised’ or ‘Uncrystallised’ refers to whether an individual has or has not received benefits from a pension they may have. ‘Crystallised’ is where an individual has received benefits from their pension fund.”
Transfers in to the new scheme will be allowed but the original scheme has to pay 10% of the fund to the Isle of Man Treasury before confirmation of the approval of the transfer is given by the Treasury:
- Only Manx pensions can be transferred in; and
- No Defined Benefit schemes (final salary) can be transferred into the PFS
“A Defined Benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum (or combination) on retirement that is typically based on the employee’s earnings history and service, rather than depending directly on individual investment returns like a Defined Contribution pension plan.”
There were also announcements that affect all Isle of Man pension schemes from April 2018.
The Finance Minister announced that the limits for Triviality and Remnant were to increase to £100,000 and £142,000 respectively, taking a large number of pensions out of the need to use this new scheme. The previous limits were £50,000 and £71,000.
“In some circumstances you may be able to take the whole of your pension as cash. Taking cash in this way is called ‘Triviality’, if you have not taken any benefits before, or ‘Remnant’ if you have started taking benefits already.”
In addition, the maximum annual contribution to a pension, to receive tax relief, is reducing from £300,000 per annum to £50,000 per annum. Contributions in excess of this new limit will be subject to a 40% tax charge. At the time of writing (1st March 2018) it is not clear how this new lower maximum will affect Defined Benefit Schemes where employers are typically funding a significant cost of the scheme.
For individuals who have a pension from an insurance company, with a transfer value of £200,000 there will be 3 choices:
- Take the tax-free cash and an annuity;
- Move it to a Manx SIPP; or
- Move it to a Pension Freedoms Scheme.
In theory this is the most cost effective but we do not know the actual cost of the annuity only the rates that they will pay out. This option depends upon the level of payment and whether or not a guaranteed payment for the rest of your life is required.
“An Annuity is a fixed sum of money paid to someone each year, typically for the rest of their life.”
This allows 30% to be taken tax free, maximum of £60,000 in this example, and the other 70% or £140,000 to be drawdown at your marginal rate based upon the individuals GAD rate which is based upon your life expectancy and the 15-year Gilt rate currently just under 1.5%. You can take 150% of the GAD rate which for a 65-year-old is about 6% therefore you can take around 9% of the fund value, in this example £12,600. That is the maximum for the first three years. As you get older the GAD rate is likely to increase.
Assuming a 20% tax payer then the total tax is £28,000 plus tax on any growth in the fund.
On death a further 7.5% of the remaining balance will also be payable which could reduce the overall charge depending upon when death occurs.
“A SIPP is a Self-invested personal pension. A SIPP is the name given to the type of government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of approved investments.”
Pension Freedoms Scheme
The original pension provider would have to pay £20,000 initially, in this example, that means £180,000 would then be invested of which 40% or £72,000 can be drawn free of tax and the remaining £108,000 can be drawn at any time subject to tax. At 20% this would amount to £21,600 making a total of £41,600 plus taxation on any growth in the fund.
On death the whole of the remaining balance is paid to your loved ones free of tax; again, this would create savings.
If you need to transfer a pension into this scheme it has the potential to enable planning for your retirement and to maximise tax efficiency assuming that you will not have sufficient income in retirement to pay the maximum tax rate.
For a new entrant who is just starting to save this will allow a 40% tax free lump sum £80,000 and 60% to be drawn down (£120,000) which would mean a tax bill of £24,000 plus tax on the fund growth so for someone starting now the PFS is potentially better value depending upon charges.
This new scheme has increased the complexity of planning for your retirement, the planning is unique to each individual depending upon your circumstances, you really do need to take financial advice and ensure that you choose the right scheme for you and have enough income in retirement