Your Taxes: Protecting your UK pension

If you're an immigrant from the UK receiving a pension, you're probably aware that your tax liability may be more than other immigrants.

By LEON HARRIS
March 1, 2011 22:26
New Israeli Shekels

Money Shekels bills 58. (photo credit: Courtesy)

If you are an immigrant from the UK receiving a pension, you are probably aware that your tax liability may be more than immigrants from most other countries. Why?

The problem was summed up in the article “Squabble over settlements puts British olim in a tax jam” (The Jerusalem Post, February 18, 2011). Here is a review of the problem, the effect of new domestic legislation in the UK and the resulting solutions.

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The problem

According to the UK-Israel tax treaty (Article 11), Israeli residents are taxed in the UK on their UK pensions and annuities if they are not subject to Israeli tax thereon; for example, if they claim the 10-year Israeli tax holiday for non-Israeli source income and gains. (Different rules apply if you worked for the UK government).

It used to be possible to apply to the Israel Tax Authority to pay Israeli tax at a low rate, such as 5 percent or 10%. However, last year the ITA announced it was withdrawing this possibility because Israeli law allows new residents to disclaim part or all of their exemptions but not choose a tax rate.

An affected individual might wait for a new UK-Israel tax treaty that would allow an exemption to new residents in the UK and let Israel tax or exempt them. A draft of a new treaty has been initialed by UK and Israeli tax officials, but it has not been published; it still has to be approved by each country’s cabinet and then ratified by the Knesset and Parliament.

Unfortunately, that process is stalled. The Post quotes a British Embassy representative as saying the logjam is related to the political status of east Jerusalem, the West Bank and the Golan Heights: “The Israeli government wants Israeli settlers to be included in the new Double Tax Agreement…[but] the UK’s long-standing position is that settlements in the occupied territories are illegal.”

The current UK-Israel tax treaty was signed in 1962 and amended by a protocol signed in 1970. The treaty defines Israel as “the territory in which the government of Israel levy taxation.”

Possible solutions to check out

One possible solution is to elect to pay Israeli tax in the same amount that would have applied in the UK on the pension. But if the individual has other income, is the pension income taxed first or last, or does an average tax rate have to be calculated?

Another possibility for people of pension age (generally 67 for men, 62 for women) is to enjoy an exemption on 35% of the pension income and to pay regular Israeli tax on the other 65%.

A third possibility is to consider converting the pension, before pension payments begin, to a QROPS (Qualified Recognized Overseas Pension Scheme) approved by Her Majesty’s Revenue & Customs.

Proposed UK pension rules

The current UK pension system is rather complex and restrictive. The UK government is of the opinion that if pensions are less complicated and more flexible, people will be encouraged to save for their retirement.

One of the most disliked UK pension rules is the need to purchase an annuity at age 75. Although there is technically no need to purchase an annuity at 75, the practical choices available make it the only real option.

On announcing the review, the UK government moved the rules that apply at age 75 to 77, so that people wouldn’t be disadvantaged while the review was under way. At the end of last year the government announced its initial findings with a view of implementing them this April. It seems the proposals are to go ahead.

Does a retiree in Israel, or indeed any Israeli immigrant with a UK pension, need to be concerned with the proposed changes?

The answer is yes. From looking at the proposed rules it is likely that olim will gain somewhat from the new rules, but is it enough? They will now have various choices that they didn’t have before, and it is important for people with UK pensions to take professional advice.

The main changes concern what happens to one’s pension fund on death. Below is brief summary of the UK tax side: Under current rules: • Before taking benefits and below age 75: 100% passes to the spouse/children with no UK tax.

• After taking benefits, ages 55-75: UK tax charge of 35% applies.

• After age 75: UK tax charge of up to 82% applies.

Under the proposed rules:

• Before taking benefits and below age 75: No change is proposed; 100% passes to the spouse/children with no UK tax.

• After taking benefits, ages 55-75: UK tax charge of 55% is expected.

• After age 75: UK tax charge of 55% is expected.

Under a QROPS:

• Before taking benefits and below age 75: No change is proposed; 100% passes to the spouse/children with no UK tax.

• After taking benefits, ages 55-75: No UK tax charge is expected.

• After age 75: No UK tax charge is expected.

For the last few years the standard advice to olim was to move their pension to a QROPS. However, the proposed rules complicate matters, and it may not always be best to move your pension to a QROPS.

The proposed rules allow you to access your entire pension pot subject to a 55% tax charge (i.e., you can get 45% of the total fund), provided that you have a guaranteed income of £20,000.

The UK government has been very prescriptive on what a “guaranteed” income is.

Company/government pension payments and annuity income are essentially all they class as “guaranteed.” For example, if you have £30,000 income from rental property, none of it can count toward your “guaranteed income” under the proposals.

Once you have an income of £20,000 in the UK, or even in Israel, you can access your pension pot after paying 55% tax.

According to the proposals, those who return to the UK within five years will have to repay the tax. This implies (hopefully it will be clarified in April) that if you are out of the UK and you don’t intend on going back to the UK (majority of olim), then you can access your entire pension pot free of tax! That is a very interesting prospect.

However, only people with sizable pension funds are likely to benefit from this rule change. To access your pension pot you must have a “guaranteed income” of £20,000 per year regardless of whether you are a UK resident or not.

For example, a married couple aged 65 apparently must have a pension pot of £630,915 to secure a guaranteed income of £20,000 on the basis of joint life, 100% spouse benefits, escalating with the UK retail price index.

It may be better to move the entire pot into a QROPS where you can continue taking a similar income and leave the entire remaining pot to the children upon death.

And the income from the QROPS will not be taxed in Israel (nor the UK) for new immigrants for 10 years.

Always consult experienced pension and tax advisors in each country at an early stage in specific cases. Nothing in this article should be taken as advice, especially as the new UK rules and draft UK-Israel tax treaty have not been finalized and indeed may ultimately be different.

Thanks to Simon Benarroch of Raymond James of Golders Green, London, for helping with this article.

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.


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