Money Times - February 10, 2015

Posted by Jill Kerby on February 10 2015 @ 09:00




If you could access the savings in your pension fund, would you? What about savings in a UK pension fund that you have left behind and thought you would collect at retirement?

From next April 6, all holders of UK defined contribution pensions who are age 55 and over, will have access to their savings. The first 25% of the pension fund value can be encashed tax-free. The balance can then either be encashed at your marginal tax rate; an annuity for life can be purchased with the balance or the balance can remain invested. From this you can then opt to draw down further income (which will be subject to your marginal tax rate.)

The question for Irish holders of UK defined contribution occupational or personal pensions (say if you were self-employed) is how the proceeds of their early encashed pensions will be treated?  Will the UK Revenue still permit 25% of the fund to remain tax free if it leaves their jurisdiction?  Will the Irish Revenue seek to tax the 25% here?  How will both tax authorities treat any subsequent pension income?

Pension access

One of the recurring questions that I’ve received from readers who are self-employed people, small business owners, but also sometimes just ordinary workers since the 2008 crash has been “how can I withdraw some of the savings in my pension fund?”

Access to the tens of thousands of euro (perhaps even hundreds of thousands) in their Irish pensions, they tell me, could solve some very difficult, short-term problems like an unpaid corporate invoice that is holding up an important sale or expansion; mortgage arrears that needs to be paid off or even the payment of university fees.

For many, who worked for years in the UK, “Pension Freedom Day” on April 6 might be the answer they’ve been waiting for. (Pension access is highly restricted but not impossible here in Ireland, but it is complicated by the kind of pension you have, your age, the state of your health and the rules of your individual pension scheme.)

Financial advisers and pension experts I have spoken to, including a spokesman for the Irish Association of Pension Funds say that no guidance notes have been issued by the Irish Revenue about the upcoming changes in the UK pension system.

They say that the UK development is not referred to  - not surprisingly since it is brand new – in the rules that do apply to tax treatment of foreign pensions and income that is reverted to Ireland.  Despite the dual tax agreement between Ireland and the UK, the experts say it is not entirely clear if the way existing UK pension income reverted here by genuine retirees will also apply to people who encash them earlier than their (former) employers retirement age.

In other words, as one expert told me, “we’re in brand new territory”.

No one knows for sure how many Irish residents are holders of UK-based defined contribution pensions. I’m guessing, based on the high level of immigration since the 1970s, the numbers run in the tens of thousands.  Some might have only belonged (even unknowingly) to a company pension for a few years before they moved on, perhaps to another firm or came home.

UK pension retirement age rules are quite similar in many ways to our own and early retirement is possible (before 60 or 65) where someone has stopped working in their 50s, say, due to redundancy or ill health.

And while the 25% (or 1.5 times final salary) tax-free encashment of a defined contribution pension applies in both jurisdictions, the rules also diverge: unlike the UK we have a maximum lump sum limit of €500,000 of which only the first €200,000 (a lifetime limit) is tax-free. The €300,000 balance is then subject to 20% tax. Total funding for pensions (with tax relief) is also restricted here to €2m and funds worth more than that will be subject at retirement to a once-off tax of 40%.

All of these different rules may have to be taken into consideration for some Irish holders of UK pensions if they do want to either encash all or part of their pension, continue to invest it or buy an annuity with the fund.

If you are such a person – 55 or over, with a UK pension - I’d like to hear from you.  Are you considering joining Pension Freedom Day?  If you do, you will need both impartial investment and tax advice – especially in the absence of clear guidance about the tax treatment of your UK pension money whether you bring in home or leave if there.

Meanwhile the UK government is expected to launch a website shortly to help defined contribution pension holders decide for themselves the pros and cons of accessing their pension funds early. See https://www.gov.uk/pensionwise 

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.



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