Would you pass up an extra 10% of retirement income for free?

Would you pass up an extra 10% of retirement income for free?


extra 10Pension Freedom Schemes (PFS) legislation was introduced in the Isle of Man on 6th April 2018 to offer improved flexibility when taking Isle of Man pension benefits. Yet many personal and company pension plans have not yet taken advantage of the new regime.

Let’s remind ourselves of the key differences:

 

1989 Regime

PFS Regime

Earliest Retirement Age

50

55

Latest Retirement Age

75

No limit

Full Encashment possible

Up to £100k

No limit

Max income after lump sum

Capped

No limit

Transfer in fee

None

10%

Tax free cash

30%

40%

Tax on Death

7.5%

0%

 

To be clear, both regimes remain current and have different benefits under different circumstances.  However it is, in the vast majority of cases, more beneficial to provide any new pension contributions from 6 April 2018 into a PFS qualifying arrangement.

Why only new contributions from April 2018? This is mainly down to the 10% transfer charge levied by the IOM Treasury. Conversely if it makes sense for you to do so, you can transfer any PFS values into a Section 1989 scheme without charge.

Of course every circumstance is different and we would always recommend that you discuss your own or your businesses circumstances with a professional financial advisor. 

So are you any worse off for not moving your new contributions into a PFS qualifying scheme? The simple answer is yes! The table below offers a very simplified view of the impact and assumes no investment growth. The longer the delay, the more this effect is compounded so we could encourage all company and private pension scheme sponsors to take action sooner rather than later and review your current arrangement with your financial advisor.

Paid into existing scheme

£10,000.00

Paid to PFS

£10,000.00

30% tax free allowance

£  3,000.00

40% tax free allowance

£  4,000.00

Tax on balance (20%)

£  1,400.00

Tax on balance (20%)

£  1,200.00

Total Balance to Member

£  8,600.00

Total Balance to Member

£  8,800.00


Whilst both scheme regimes benefit from the same tax relief the increased tax free allowance means an improvement of 10% for the PFS savings after tax over the current regime. Over time and allowing for average investment returns over the long term the difference can be substantial.

The flexibility within this new regime also lends itself to helping those people who do not have accrued pension benefits in the latter part of their career or perhaps those who are self-employed. A PFS qualifying Self Invested Pension can accept property and other assets that could fund a retirement benefit in a very tax efficient way over a relatively short savings time horizon.

Do remember that access to funds would only be available from age 55 and the maximum anyone can save into a pension scheme is £50,000 per annum. In order to save that amount you must be in receipt of at least £50,000 of taxable income. For those yet to take action there is an opportunity to maximise your contributions before the new tax year in the Spring, which, happily, is less than 16 weeks away.

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