Leaving the UK – should I transfer my pension to the Isle of Man?
A consideration for people moving to the Isle of Man is what to do with their UK pension(s). These pensions could be your primary financial asset, so it’s essential professional advice is taken.
If you have a UK financial adviser, who has been advising you on your pension and investments, likely, they will no longer be able to work with you for regulatory reasons.
We work best with people looking for a professional partner to help with their retirement planning.
It shouldn’t be all about the money
This focus is the most critical point. Lifestyle and family factors should be the dominant driver behind moving to the Island.
The decision to move should be a secondary consideration if it also comes with a tax benefit.
The IOM is a fantastic place with much to offer, but it’s not for everyone – you must be sure it’s for you!
This article relates to UK personal pensions, SIPPs and defined contribution occupational schemes. If you have a UK final salary pension in payment, this link will provide useful information about what you should do. It also covers the situation with your state pension entitlement.
The starting point
The regulation and tax treatment of UK and IOM pension schemes are very different. Making assumptions based on your knowledge of what happens in one jurisdiction is potentially dangerous.
Whether transferring your pension from the UK to the IOM is advantageous depends on your unique circumstances. It certainly isn’t a “no-brainer” to move it.
Many considerations need to be made to establish whether this would benefit you and your family.
If you are still working and plan to keep saving, there are restrictions on how much you can continue to contribute into your UK pension after moving to the IOM.
You shouldn’t assume that you can carry on as you are. If you’re already retired and no longer contributing, this won’t be an issue.
Tax-free lump sum on UK schemes
This tax-free cash is generally 25% for UK tax residents. However, the IOM Government may not allow the lump sum payment to be “tax-free” for IOM tax residents; therefore, you may have to pay IOM income tax on the capital sum.
This may be a reason to take the tax-free cash while you are still a UK tax resident or transfer it to an IOM pension, giving you access to a tax-free lump sum. This won’t be a consideration if you’ve already taken your lump sum.
Where your beneficiaries live is likely to have a big say in the tax treatment of your pension on death.
Current UK pension rules mean they can often be passed on to UK resident beneficiaries, relatively tax efficiently on death. This inheritance is tax-free up to age 75.
Where death is after age 75, it will be taxed at the beneficiary’s UK marginal income tax rate.
This needs to be weighed against the tax treatment of an IOM scheme on death, where the remaining pots are subject to an IOM tax of 7.5% when paid out as a lump sum to beneficiaries.
Income payments from UK pensions are generally paid to IOM tax residents after some UK tax has been deducted.
However, it is possible to arrange with some UK pension providers (by filling in the necessary paperwork with the IOM Income Tax Division and HMRC) for income payments to be made gross of UK tax. You would then pay IOM income tax on these payments.
If it’s not possible to do this with your pension provider, then transferring to an IOM pension could be an option. Doing this would ensure that only IOM tax is paid on any income received. The top rate of income tax on the Island is 20%.
UK Lifetime Allowance
This is a topical point after the March 2023 UK budget, where the lifetime allowance (LTA) was abolished.
UK pensions have been subject to an LTA, which is an overall limit on the value of someone’s pension before tax charges apply.
A transfer to an IOM qualifying scheme had previously been tested against the LTA. Any amount over this allowance was taxed at 25%.
With the removal of the LTA, there will be no such test on transferring. It should be noted that when writing this article, the Labour party said they would re-introduce the LTA.
The reach of UK pension rules
If you transfer to an IOM pension:
It may still take up to 10 years before you free yourself from the UK pension rules
If things don’t work out or your circumstances change, you may want to return to the UK. The UK pension tax rules would then come into play and apply to your IOM pension.
This means you may not benefit from having transferred to an Isle of Man scheme and could be subject to both UK and IOM tax in certain situations.
The charges for pensions transferred from the UK to the IOM can be higher. A cost-benefit analysis of the advantages you would receive versus any extra cost of transferring is essential.
Flexibility / UK “Pension Freedoms”
Many UK pension schemes have taken advantage of pension freedoms rules introduced in 2013. They allow you to take as much as you want when you want, from age 55 (rising to 57 from April 2028), subject to income tax.
This won’t be the case for an IOM scheme you transfer into, where a maximum amount is permitted to be taken each year rather than unlimited.
Guaranteed annuity rates
Some UK pensions, often older ones going back 3-4 decades, may offer a guaranteed annuity not available in the IOM. If you are fortunate enough to benefit from such a feature, they can often have rates of 10% p.a. attached to them for life; it does not make sense for most people to transfer them.
Our job is to consider all these issues, considering your personal circumstances and objectives, to see whether staying in your UK scheme(s) or transferring to an IOM scheme would deliver the best outcome for you.
It’s almost certain that the rules and tax treatment of pensions will change in both jurisdictions during your life. This is one of the reasons why we think ongoing advice is essential for our clients.