Avoid paying 55% tax on your UK pension
Many expatriates living here in Switzerland or worldwide for that matter, are potentially going to be liable to pay the additional 55% tax when they draw upon their UK pension assets. This is mainly due to the Life Time Allowance (LTA) being reduced significantly over the past years. For example between 2010 and 2012 the LTA was £1,800.000 and now it is just £1,055.000.
So what is the life time allowance?
The Lifetime Allowance or LTA is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.
What does this mean and how does it impact your pension income?
In short this means if your pension fund exceeds £1,055.000 when you either crystallise your pension or turn 75 years of age, you will be liable to pay the additional LTA tax. This will be applied differently depending on how you decide to draw upon your pension. If you take your pension as a lump sum you will be charged 55% on the amount over the LTA. If you wish to draw an income you will be charged 25% plus your nominal rate of income tax.
Will you be liable to pay the LTA tax charge?
Whilst a pension fund of over £1,055.000 may sound like a significant amount, it is very common for schemes to exceed this value. Even if you are no longer contributing to your scheme, if it is invested the growth alone could still take your UK pension over the allowance. For example if you currently have a pension fund valued around £550,000 and you average a return of 7% per annum, after 10 years you would have doubled your pension fund and now have £1,100.000.
The above table illustrates just how quickly your pension fund can exceed the life time allowance, should it be invested and managed correctly. If your pension is not currently invested we strongly recommend that you speak with your scheme or contact us. If you are 40 years of age today, you can also see even with a modest pension value of £100,000 you could still potentially exceed the current LTA and have to pay additional taxes on £95,000. If you were to take this as a lump sum that would equate to a tax charge of £52,250.
So how do I avoid paying 55% tax on my UK pension?
There are methods that allow you to crystallise your pension prior to drawdown such as utilising a QROPS structure. However, there are many things to take in to account considering such as where you are resident. For example, if you currently reside in Switzerland a QROPS would maybe not be your first choice as a 25% tax charge would be levied.
Like with any other form of investment or tax advice, planning ahead and seeking professional help is a critical first step. At SuisseRock Advisory Services we have over a combined 30 years of experience helping our clients with such matters. We offer a complimentary UK pension review service and will provide you with all of the available options for you to consider.