While always interesting to hear what is happening on the adjacent isle, there is rarely anything that particularly affects us directly, albeit historically we have occasionally aimed to replicate or improve upon what the UK have introduced from a pensions perspective. A fairly recent example being the introduction of Pension Freedoms.
As seems to be the trend over recent years when it comes to the UK Budget, details were leaked before the statement in the Commons and we were therefore already expecting the possibility of a substantial increase in the Lifetime Allowance (LTA) and perhaps the annual contribution allowance.
The LTA, introduced on 6 April 2006, was a result of new UK pensions regulations, known as the ‘Pension Simplification’ regulations, that came into effect as part of ‘A Day’. The intention of the LTA was to limit the amount that could be built up within a pension pot over an individual’s lifetime (before tax would be incurred on the excess) and this applied to both Defined Contribution and Final Salary schemes. There were a number of protections built in for those with existing benefits and initially not many people were overly impacted.
With the reduction in the LTA to £1.073 million a few years ago more people had fallen within the scope of being affected, in particular those in Final Salary schemes where the calculation of capital value for testing against the LTA was based on a 20x multiple of annual pension, meaning that anyone with a pension of circa £53,650 pa or above would have suffered a penal tax charge on the excess. For senior doctors, as an example, retiring early became a more common option.
The announcement from the Chancellor that LTA related tax charges will cease with effect 6 April 2023 (with the LTA regime being abolished in its entirety by 2024/25 tax year through a future Finance Bill) will remove the potential disincentive to continue working for many. This will include high earners of employers with Final Salary pension schemes and those with well-funded Defined Contribution schemes. This will hopefully encourage more people to continue working and contributing to their pensions if they wish.
Interestingly though, the maximum amount of lump sum that can be taken tax-free from a pension (PCLS) has been capped at 25% of the current LTA i.e. frozen at a limit of £268,250.
The other big change was the increase in the maximum amount that can be contributed to a UK registered pension scheme each year and benefit from tax relief, being increased from 6 April 2023 to £60,000 pa from the current rate of £40,000 pa.
What do these changes mean for the Isle of Man?
From an Isle of Man resident’s perspective, not a great deal. However, with many Manx residents having a UK pension scheme, either through previous UK employment or their Isle of Man company pension being a UK registered pension scheme, the abolition of the LTA may remove one reason for not transferring their pension to an Isle of Man scheme. There are important points that need to be borne in mind when transferring a UK pension to an Isle of Man scheme but, with proper consideration and advice, the advantages of doing so for a long term Isle of Man resident may far outweigh retaining the pension in the UK and within the scope of the UK tax net. Such benefits stretch beyond the obvious of having the pension fund domiciled in the individual’s home country to increased tax efficiencies both during the member’s lifetime and for their beneficiaries.
On a separate note, the UK is now raising the incentives to save for retirement, and with the annual tax relievable amount being increased to £60,000 the Isle of Man’s current limit of £50,000 no longer seems comparatively generous. (As a reminder, the Isle of Man annual allowance was formerly £300,000, until it was slashed to the current limit on 6 April 2018) - perhaps a similar increase is now in order?
John Batty
Technical Sales Manager
