A raft of changes to the United Kingdom pension tax rules rolled out on Monday has brought a gleamer of hope for local pensioners, who have been calling for exemption from income tax.
The new measures in the UK pension market give greater flexibility when accessing money purchase pension savings. Under the Pensions Flexibility 2015 a number of changes are being made to pension tax rules to reflect the greater flexibility individuals will have to access their pension savings from age 55. Among others, the changes will allow all of the funds in a money purchase arrangement to be taken as an authorised taxed lump sum, removing the higher unauthorised payment tax charges. There also will be increased flexibility of the income drawdown rules by removing the maximum ‘cap’ on withdrawal and minimum income requirements for all new drawdown funds starting 6 April 2015. Further the new changes will enable those with ‘capped’ drawdown to convert to a new drawdown fund once arranged with their scheme should they wish, and enable pension schemes to make payments directly from pension savings with 25 per cent taken tax-free (instead of a tax-free lump sum).
The Chairman of Botswana Public Officers Pension Fund (BPOPF) board of trustees Carter Morupisi said they are yet to study and familiarise themselves with the changes to identify areas which may be relevant to the local pension market. He however emphasised that they will do so with caution because the requirements, dynamics and situations for advanced economies are totally different from developing countries. "We are not privy to why they have made a raft of changes. We will look at their structure and study their laws to see if there is anything that could be beneficial to local pensioners that we can adopt," he said.
BPOPF has experienced phenomenal growth since inception owing to the overwhelming positive response from public servants. The Fund's assets under management have breached the P45 billion mark, despite the fund facing challenges relating to subdued economic growth both locally and globally. The Fund was established in 2001 following government decision to change the public officer’s pension arrangement from a Defined Benefit Pension Scheme to a Defined Contribution Pension Scheme.
Former police Commissioner Norman Moleboge-president of Botswana Civil Service Pensioners Association (BCSPA) said on Friday that they were not aware of the changes to pension tax rules in the UK. He, however, said any laws that will improve the welfare of pensioners is welcome. He said they will study the changes and compare with what obtains locally and where possible lobby government to push for the adoption of similar flexibility rules in the local pension market to benefit pensioners. Moleboge then raised similar concerns about the pension fund to those addressed by the new flexible rules in the UK. He said they are unhappy with some aspects of the administration of pensions locally. He said their biggest concern is the tax levied on pensioners' income regardless of their age. "Taxing of pensioners is unfair. Our position is that pensioners should be exempted from income tax or alternatively a different formula could be designed that is suitable for pensioners. This could be done by setting a different threshold for pensioners or setting age limit beyond which a pensioner is exempted from paying tax," he said.
In Botswana a threshold of earnings from P3000 and above attract income tax, regardless of source.
Changes to the UK pension tax rules will also introduce a limited right for scheme trustees and managers to override their scheme’s rules to pay flexible pensions from money purchase pension savings, and remove some restrictions on lifetime annuity payments. The new changes will ensure that individuals do not exploit the new system to gain unintended tax advantages by introducing a reduced annual allowance for money purchase savings where the individual has flexibly accessed their savings, and increase the maximum value and scope of trivial commutation lump sum death benefits.
The new changes will provide new information requirements to ensure that individuals who have flexibly accessed their pension savings are aware of the tax consequences of doing so. The changes will reduce certain tax charges that apply to death benefits, and also enable persons other than dependants to inherit unused drawdown funds and provide that where the death occurred before age 75, lump sum death benefits and drawdown pension from these funds can be paid tax free, subject to the member having sufficient available lifetime allowance. Further the new changes will make changes to the rules for UK individuals who receive UK tax relief for contributions to non-UK pension schemes, so that the flexibilities and restrictions to relief apply equally to them.