The Treasury Minister has finally unveiled his much-heralded reform of the Island’s personal and occupational pension framework by introducing a system similar to that introduced in the UK back in 2015.
The reforms take shape in a brand-new type of scheme, referred to by Treasury as the Pension Freedom Scheme (“PFS”). This will be enshrined in freshly created legislation, taking effect from April this year, which will provide pension savers access to their entire pension pot in one go.
Current rules for pension savers allow, from age 50, up to 30% to be taken as a tax-free lump sum with the balance of the fund taken as income over time, that income being calculated according to a formula tied to fixed income returns. For many, this has proved frustrating because the income levels have been consistently low since the financial crisis and the availability of decent quality guaranteed income products has been virtually non-existent for local pensioners.
Members in the new PFS will be able to access, from age 55, up to 40% of the accumulated fund tax-free with the remainder taken as and when they like, taxed at their prevailing rate of income tax.
There will also be a charge of 10% levied on any transfers made between other types of Isle of Man scheme and the PFS. This seems to be an attempt to reduce any tax leakage from those who have benefited from tax relief under current rules and who move across to the new scheme where they would gain greater tax-free access.
In a move that came out of the blue, Treasury has also granted additional freedoms to existing pension arrangements. Currently, a pension pot of less than £50,000 after tax-free cash has been taken (i.e. £71,000 in total) can be fully accessed under what are known as remnant rules. These rules will be amended so that the limit is now £100,000 net of tax free cash, which translates to full access for a pension pot of up to £142,000 without having to pay the transfer charge.
It’s not all give-aways, though. There will now be a maximum annual tax-relieved savings amount of £50,000 which applies to all tax-approved pensions on the Isle of Man, including those under current rules which until now have enjoyed an upper tax-relieved limit of £300,000 per annum.
Martin Hall, Director of Pensions at fiduciary and pensions group Optimus, is convinced this is good for the Island’s savers:
“The greatest step forward comes in the form of choice, particularly for the corporate market” he says. “Most company-sponsored schemes will be making the levels of contributions that will easily fall within the tax-relieved limits of the new scheme. They now have an opportunity to review their future staff pension provision according to how people envisage taking benefits in retirement. You may well find that future contributions are diverted away from the limited range of options currently available towards schemes that are more relevant to individual retirement plans. As an industry, we have an opportunity, and perhaps a responsibility, to create products to meet that need”.
But, he adds, that does not mean the end for the existing pension regime which he feels can co-exist happily with the new kid on the block:
“There is absolutely no reason why individuals and companies cannot blend their approach to pensions according to the advantages of different sections of the tax code. For example, the PFS allows access at age 55 with a 40% upper limit on tax-free cash, whereas schemes under the existing rules provide access 5 years earlier but at the lower tax-free amount of 30%. You can envisage circumstances where a blended approach is adopted, and this represents a new challenge for advisers planning retirement for their clients. Whereas before there was really only one set of options, now they are multiple, and that can only be good for consumers”.
Whether you are an international firm or located on the Isle of Man we will be able to assist you.Mark Schofield, Director
Flexibility is key. We put your requirements first, then deliver outstanding service in everything we doKerry Jones, Senior Manager
In all my years of working with Optimus, they have always conducted themselves in a highly professional and timely manner whilst providing an excellent service to their clientsIndustry Professional, Director
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