The Isle of Man government is keen to promote the island as an attractive place to locate a business. To this end, it has published proposals to simplify its tax regime for pensions, with the intention of enabling the Isle of Man to remain competitive with other countries. As such, many of the proposed changes are similar to those that have applied in the UK since 6 April 2006 (A-day).
The Isle of Man government hopes that by making the tax regime for pension schemes simpler and more flexible, this will increase take-up of pension provision on the Island. This has been difficult to achieve given the low levels of taxation paid by resident individuals and companies.
The proposed changes will help to create a level playing field for money purchase occupational schemes and personal pension plans. Individuals will be able to pay contributions to a money purchase pension scheme within a annual allowance (AA). Companies currently receive tax relief on contributions to approved schemes up to the amount of their profits. It is possible, therefore, that the AA will not apply in relation to employer contributions, although this is likely to depend on the level at which the AA is set.
There will be no limit on the overall benefits payable from money purchase schemes, as existing revenue limits will be abolished. Furthermore, their are no plans to introduce a lifetime allowance. The latter will avoid the necessity to protect existing pension rights of high earners, which has led to much of the complexity in the UK’s A-day tax regime. However, existing limits for contributions and benefits will continue to apply to defined benefit schemes.
The amount that can be taken from any approved scheme as tax-free cash will increase to 30% of the value of the member’s fund. It has been set at this level to enable Isle of Man schemes to continue to meet the requirements for a Qualifying Recognised Overseas Pension Scheme (QROPS). Transfers made from a UK-registered scheme to a QROPS are authorised payments and consequently tax-free. To qualify as a QROPS, schemes that are established outside of the EU (and do not have a suitable double taxation agreement with the UK), and this includes the Isle of Man, must ensure that at least 70% of any funds received from a UK registered pension scheme are used to provide an income for life.
In addition to increases in the benefits that members will be able to receive, there will also be increased flexibility regarding the delivery of benefits. It will no longer be compulsory for members of money purchase contribution schemes to purchase an annuity at retirement. The decision to remove compulsion is apparently due to concerns that there will be difficulty in purchasing an annuity with a locally-based provider on the Isle of Man, given the recent withdrawal of a major pension provider on the Island.
Instead, money purchase schemes will have to offer an open-market option, and will able to offer income drawdown, which is not currently permitted. Although no details have been given in either of the consultation papers that have been published as to whether income drawdown will be permitted after age 75, a form of alternatively secured pension might be available to members. Given that no inheritance tax is payable by residents, intergenerational wealth transfer is unlikely to be an issue.
It has already become simpler for members with small funds to commute them for a lump sum. The Isle of Man has published an Extra Statutory Concession, effective from 6 April 2007, which permits members aged 60 or over to receive the whole of their pension fund as a lump sum. This is on the proviso that when aggregated with any benefits held in other approved schemes, the benefits value does not exceed £16,000 (€23,013).
Although this appears to be similar to the UK’s trivial commutation rules, which have been causing administrative difficulties for pension schemes, the Isle of Man assessor of taxes still has the discretion to approve a trivial commutation lump sum to be paid in certain circumstances. This is intended to permit a member to commute a fund that, due to its size, is too small to either purchase an annuity or transfer to another pension arrangement, even if, when aggregated with other approved pension benefits, the value exceeds £16,000.
The Isle of Man intends to include these changes in a pensions bill, and the new features will come into force from April 2008.
Liz Peacock is a senior consultant at Watson Wyatt
No comments yet