Going back a bit, my very first blog was me having a bit of a moan about how disadvantaged we had become (pension-wise) on the Island compared to our UK counter-parts.
Well here we are, about a year later, and earlier this month the new IOM-based pension was released with a more flexible approach.
So how does it work and what does it really mean?
First, what is it?
The Island’s pension reforms are quite different from those enacted in the UK, for a number of reasons.
Firstly, if you have an existing pension, nothing much changes, except some numbers on cashing it in (see below).
So, anyone expecting true pension liberalisation is in for a disappointment.
What we actually have now is a new product altogether with specific new rules rather than a modification of an existing product.
This may have you scratching your head as to why this was done. But once you understand that, if you want to transfer your existing pension into this new product (to take advantage of the new rules), you’ll have to pay a whopping 10% charge to the IOM Treasury.
Confusion cleared up.
This may or may not be a price worth paying, but it certainly is a big decision and one that should not be made lightly.
Oh, and by the way, you’ll also have to wait a little longer before getting your hands on your pension because the new rules move “retirement age” to 55 compared with 50, under previous/alternate rules.
Show me the money!
On the plus side, you can now withdraw 40% as a tax-free cash amount, up from the present 30%.
But how does that stack up with the penalty involved?
Well, if you transferred in say £100,000 from your existing pension into the new pension rules, then you’d pay £10K in penalties.
This leaves you with £90K.
Then let’s say you decide to immediately take 40% tax free cash (not the best advice, but please bear with me on this), you’re left with a lump sum of £36K, as opposed to £30K under the old scheme (£100K x 30%).
So to achieve an extra £6,000 with the effective saving of £1,500 (£6K/ 0.80), you’ve paid £10,000.
Sound like a good deal?
You’ve also got to take this tax-free cash out in one go when you draw your pension.
Unlike in the UK, there is no incentive to leave the money in the pension so that you can have lump sums which contain your tax-free cash element as well as your taxable.
On the income side – well, you can have as much as you like, although obviously you’ll be taxed (again).
Can I just cash it all it then?
One thing the new rules have done is to raise the minimum limit on what is known as the Fund Remnant Rules to £100K.
These rules mean that if your pension pot is worth less than a certain amount, then you can cash it in (not including tax free cash).
So in the above example, if you had £100K, then you’d be able to just cash it in without transferring it to the new rules. In fact, when taking tax-free cash into consideration, this then increases to around £142K (£142 x 30% tax free cash leaves £99Kish).
The problem is that it’s a sort of all-or-nothing approach and does nothing for retirement planning and is not tax efficient (yeah, I know, not a great big problem over here, but tax is still tax).
There are some not so exciting limits as well…
For example, you can’t put more in than £50K per year, which sounds fine, until you know that the limits of the old schemes were £300K.
Also, you can only transfer in Isle of Man pensions – so if you have UK pensions that you want to merge into, then hard luck.
And it won’t accept any transfers from DB pension schemes – although whether you could transfer your DB scheme first to an IOM SIPP and then on to one of these pensions is still to be clarified and thus tested.
So who is this actually any good for?
Well, if you’re just starting off making pension contributions, then this is the ideal scheme because you obviously don’t have to worry about transfers at all.
So for the generation coming behind us then, this is very good news indeed.
And this good news extends to all those who may be getting signed up to auto-enrolment when it eventually comes to the Island.
Also, you can pass on this pension to anyone free of charge, once you begin drawing the benefits – at present, outside of your spouse, there’s a 7.5% tax charge.
Before drawing your benefits then, it follows the same rules as present, which is basically a return of the pension to your estate, free from tax.
So, stitch up or work of genius?
I guess that depends on your circumstances, but anyone expecting real pension freedom will be disappointed, without forking out for a hefty 10% charge for it.
It also means that most of us must continue using the old rules system for drawdown or a pension annuity, neither of which give true flexibility in retirement planning.
However, for some now – and for the majority retiring (much) later – it does provide true flexibility and a way of passing on our pension assets, free from taxes (albeit 7.5% – isn’t a killer).
And best of all perhaps, you won’t have to pay that horrible 10% penalty just to get your own money!