Accessing money from your UK pension as a non-UK resident can be challenging. Annuities (guaranteed income payments for a fixed period of time or for life) are very difficult to find for Non-UK residents, which makes income drawdown a popular choice.
Before delving into the details of Flexi-Access Drawdown it is worth noting that there is another type of drawdown pension available called Capped Drawdown. Prior to the 6 April 2015, Flexible Drawdown was only available to those with a guaranteed minimum income from ‘secure’ sources. If that criteria was not met then the pension would be set up under Capped Drawdown and the income withdrawals were limited to 150% of the GAD rates (Government Actuary’s Department).
After Flexi-Access Drawdown pensions were introduced in 2015 you could not set up a new Capped Drawdown policy, but existing policies could continue. If your Capped Drawdown policy provides sufficient income, switching to a Flexi-Access Drawdown policy may not offer any additional benefit. If the income requirements are not suitable it is possible to switch to a Flexi-Access Drawdown policy. However, income taken from a Flexi-Access Drawdown plan will trigger the money purchase annual allowance (MPAA) which limits future tax efficient money purchase funding. If you do not intend to contribute to a UK pension in the future, then the MPAA is not an issue.
After age 55 (rising to age 57 in 2028), Flexi-Access Drawdown allows you to draw as much or as little as you wish from your pension. The first 25% of the pension can be taken free of UK tax, but it is important to consider how this will be taxed in the country that you reside in as many countries will not recognise the payment as being tax free. The 25% can be taken as a lump sum in one go or phased as a regular payment whereby 25% of the income is considered tax free. The remaining 75% is deemed to be taxable income and your UK pension provider is likely to tax the income at source. If the UK has a Double Taxation Agreement (DTA) with the country that you reside in it might be possible to obtain a No Tax (NT) code. This means you do not pay income tax on the income in the UK, but you would still pay any applicable taxes in the country that you reside in.
The benefit of a Flexi-Access Drawdown policy is that if you do not wish to take any income then you are not required to. There are no Required Minimum Distributions (RMD’s), and you will not pay a penalty or tax for leaving the pension untouched. In fact, it can be quite tax efficient to leave money inside of your pension to grow tax free as it is usually considered to be outside of your estate for UK inheritance tax (IHT) purposes. This is important because you can still be UK domiciled once you have left the UK. Even if you have lost your UK domicile, your UK assets are typically subject to IHT, so a UK pension should not be overlooked as it could form an important part of your estate planning strategy. If your pension value is likely to exceed the Lifetime Allowance, which is currently £1,073,100, you will be subject to the Lifetime Allowance charge of 55% if the excess is taken as a lump sum, or 25% if it is taken as income (which includes being placed in flexi-access drawdown even if no income is taken). However, if you plan appropriately you should be able to reduce or mitigate this charge entirely.
Unlike an annuity, a Flexi-Access Drawdown policy remains invested and you will need to decide on the investment strategy – capital growth, income generation, a combination of the two or capital preservation. You also have the flexibility to invest the pension in a different currency such a Euros or US Dollars and have the pension benefits paid out in a different currency as well. All these options will depend on what the individual pension provider can offer, and it is often a slight trade-off between cost and flexibility. Whilst some pension providers offer a range of options to cater to the needs of a Non-UK resident, others will not even allow a Non-UK resident to have a Flexi-Access Drawdown policy. If that is the case, you would need to transfer to a different provider to create a Flexi-Access Drawdown policy.
A Flexi-Access Drawdown policy is not going to be the right option for everybody and sometimes the security of a guaranteed income is going to be more appropriate, although this is harder to find as a Non-UK resident. If a Flexi-Access Drawdown policy is something that you would like to consider, Cross Border Financial Planning specialise in advising Non-UK residents on the options available and what the most appropriate structure would be to meet your objectives. Should you wish to find out more about how Cross Border Financial Planning can help, please feel free to contact Edward Cole at ecole@cbfp.co.uk.