If you’re moving to the Isle of Man and have a UK pension, this article should be of interest to you. As it will be if you’re already IOM resident and still hold a UK pension.
If this isn’t you, stop reading, this will be five minutes of your life you won’t get back!
Recent changes
There have been some major tax changes in the last year affecting UK pensions and the tax that applies if they are transferred to certain Isle of Man pensions. UK personal pensions, “SIPPs” and work based defined contribution schemes have been mostly affected. Final salary pensions less so.
The first of these changes stems from the abolition of the Lifetime Allowance (LTA) from 2024. This was the total amount your pension/s could be worth, without being subject to a LTA charge of up to 55% on the excess. The LTA was £1.073M
The driving force behind its abolition was a political desire to see fewer senior NHS employees retire. This was because exceeding the LTA was seen as a disincentive for them to continue working.
A new regime with three allowances has replaced the LTA. This is more favourable for final salary scheme such as the NHS, than for personal pensions, SIPPs and work based defined contribution schemes. This article focuses on the latter schemes.
The three new allowances are:
The lump sum allowance
As a UK resident, you are entitled to a tax-free lump sum, which is normally 25%. However, the lump sum allowance restricts your tax-free lump sum to £268,275.
The lump sum and death benefit allowance
This is £1,073M. It applies to lump sum payouts of UK personal pensions, SIPPs and work based defined contribution schemes on death.
Any 25% tax free cash amounts which have previously been taken during your lifetime, count towards this allowance. They therefore reduce the lump sum and death benefit allowance on death.
The purpose of this allowance is to limit lump sum payments that can be paid to UK resident beneficiaries free of income tax, where death occurs before age 75.
The overseas transfer allowance
This applies to the transfer of UK pensions to certain overseas pension schemes. It is also £1,073M. Where this is exceeded, a 25% charge applies to the excess.
It’s important to note that if you have already crystallised a pension, i.e. taken benefits from it, this will have used up some (or all) of the allowance. Therefore, it is not a given that this will be your allowance for transfers to an IOM pension scheme for example.
Inheritance Tax on pensions
Hot on the heels of the introduction of these complex allowances, was the announcement in the October 2024 UK budget that from April 2027, UK pensions would be subject to UK Inheritance Tax on death.
This is a major change. For example, it could mean that inheritance tax of 40% is payable on the pension in addition to income tax also potentially being payable on payments to the beneficiaries.
One of the reasons for inheritance tax being introduced is because pensions have been used as a tax efficient way of passing wealth down the generations. Often it was the last asset to be accessed in retirement planning, because of its relatively tax friendly status on death.
Going forward, it’s expected that pensions may instead be one of the first assets to be used and spent in retirement, to lower the overall amount of tax paid.
Should I consider transferring my UK pension to the Isle of Man?
If you have moved to the Isle of Man and intend not to return to the UK this is worthy of consideration. It’s a potential means of removing the pension from the UK Inheritance Tax net and lowering the overall tax payable on your pension/s.
Transferring it certainly isn’t a “no brainer”. For example, smaller UK pensions may fall under the threshold at which UK inheritance tax becomes payable and could therefore be less affected by these changes.
Getting advice
These new allowances, the change in inheritance tax rules and the interplay between them needs to be carefully assessed on an individual basis. Advice is essential, with several other factors to be considered in deciding whether transferring a UK pension is appropriate.
These other factors include understanding your long-term goals, where your beneficiaries are resident and how they would be taxed, the nature of underlying investments and charges to name a few.
If you feel that you may be affected by any of these changes and need some help, please feel free to get in touch.
