Far from the bland Isle of Man Budgets which have regrettably become the ‘new norm’ in recent years, on 20th February 2018 Treasury Minister Alf Cannan broke with tradition and announced a radical overhaul of the local pension landscape.
With effect from 6th April 2018, new rules will significantly change how pension schemes will operate. These include:
1. An increase in the ‘triviality’ and ‘fund remnant’ limits – These both relate to the amount of a pension fund which can be completely withdrawn (for those aged 55 or over), as they are deemed too small or ‘trivial’ to provide a pension income for life. These limits have gone up from £50,000 to £100,000 – allowing most people access to take their entire fund at retirement should they wish.
2. A large reduction in the annual allowance – Up until now, the annual limit each tax year for contributing to an Isle of Man pension has been £300,000 (subject to an individual’s taxable earnings). From 6th April, this will fall to £50,000 and will apply to employer and employee payments to all an individual’s pension arrangements, affecting many of the Island’s high earners or those wishing contribute large sums to grow their pension pots to hold property in their pension.
3. The introduction of ‘pension freedoms’ into the Isle of Man – The flagship announcement of the Budget. Following the UK’s lead, the Isle of Man Government are introducing a new Pension Freedom Scheme (PFS) product available from pension providers after 6th April. This will allow individuals full access to their entire pension from the age of 55, whatever the size of the fund. The key features are a higher tax-free lump sum at retirement of 40% (existing Isle of Man schemes are limited to 30%) and no tax on the value of any remaining fund on death; any amount over the 40% tax-free sum will be charged at standard income tax rates. To use this product, however, you will have to ‘transfer in’ any existing pensions – attracting an initial 10% tax charge on the value of the transferring scheme.
The main point to consider for all three of these changes though is ensuring that if planning any changes they are right for you.
On the point of ‘pension freedoms’, our stance is that a pension is designed to provide you with an income for life once you stop working – not as a short-term cash benefit to ‘plug a gap’, potentially adversely affecting your long-term financial position. In most cases it will be more beneficial to retain your pension as it stands than take the full value out, paying a significant amount of tax on the way. That being said, our advisers would discuss your personal circumstances in full before proceeding with any course of action.
If you are still working and regularly or intend to make contributions in excess of £50,000 each tax year then the time to act is now and we would encourage you to contact your Edgewater adviser in the next week or so to avoid missing the deadline of Thursday 5th April 2018.
As always if you have any queries about any of the above, please do not hesitate to get in touch with one of the team today.