Today (20th February 2018) at Tynwald, Treasury Minister, Alf Cannan MHK, announced his Manx Budget for the tax year 2018/19.
It contained some significant changes to existing private pension legislation on the island, including the introduction of a new form of Isle of Man pensions legislation, both to take effect 6th April 2018.
Outlined below is a summary of the key points made in today's budget.
Changes to Existing Legislation
- Triviality/Fund Remnant Threshold Limit to be increased from £50,000 to £100,000 (this effectively means that it will be possible to cash-in a pension pot of circa £142,800 by first taking maximum TFC followed by a withdrawal of the remaining fund in full; or an even greater amount if maximum first year pension income is also deducted).
- Annual Allowance for contributions to approved pension schemes reducing from £300,000 to £50,000 (tax relief available on any amount contributed up to 100% of IOM Relevant Earnings, subject to new annual cap of £50,000).
- Isle of Man Financial Services Authority to issue guidance to local pension scheme providers/members in order to assist when considering the new pension options available.
The new legislation gives local pension scheme providers the ability to offer a new type of pension product, referred to as “Pension Freedom Scheme” (or PFS, for short) which will permit full access to the scheme funds once a member reaches a certain age and can accept transfers from existing approved pension schemes, subject to a tax charge.
The specific features of the new PFS are as follows:
- Minimum Retirement Age of 55 (except in special circumstances/incapacity grounds where an earlier retirement age may apply)
- No Maximum Retirement Age
- Tax-Free Investment Roll-Up
- Maximum Tax-Free Pension Commencement Lump Sum (PCLS) of 40% of the value of the fund at time of payment
- Maximum PCLS is a one-off payment opportunity i.e. it is not possible to take partial tax-free lump sum payments by creating tranches (or “arrangements”) within the scheme
- Remaining 60% balance of fund can be accessed flexibly, either as a further lump sum or series of benefit payment withdrawals, all of which will be treated as taxable income at the individual’s marginal rate of IOM tax
- No tax due on death (subject to residual fund being paid out within 2 years since death of member)
- Annual Allowance for contributions set at £50,000 (tax relief available on any amount contributed at the individual’s highest marginal rate up to 100% of IOM Relevant Earnings, subject to annual cap of £50,000)
- Transfer fee of 10% of transferred fund imposed for transfers into new PFS from existing IOM approved pension schemes
- Transfers of defined benefit pension schemes or statutory schemes approved by Tynwald into new PFS will not be permitted
- Transfers from UK (or other non-IOM pension schemes) into new PFS will also not be allowable
- An individual is only able to be a member of one PFS at any one time
Provisions are also being made in order to address recycling of pension funds in the following form:
- Funds withdrawn from a PFS cannot be paid into another PFS
- Tax relief will not be granted on the re-contribution of funds previously withdrawn from an approved pension scheme
- Tax relief will also not apply to a contribution made to a scheme approved under the 1970 or 1989 Income Tax Act if such contributon consists of funds withdrawn from another approved pension scheme.