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Is your client interested in a pension that can invest in residential property, does not require him to buy an annuity at age 75, offers more than 25 per cent tax-free cash and attracts death duties that are less than a tenth of those on UK schemes? This is what providers based in the Isle of Man will be offering from this month, when the crown dependency passes its new Income Tax Pension Bill.

The raft of new features on offer in the Isle of Man reads like a wish list for UK pension IFAs. You might think the downside is that you have to move to the middle of the Irish Sea to benefit but that is by no means certain.

The changes clearly make Isle of Man domicile even more attractive from a tax viewpoint but these new regulations, combined with the qualifying recognised overseas pension schemes rules, may have potential benefits to those retiring or planning to retire abroad. Some providers predict that 10 per cent of the population could retire abroad by 2020, which is a considerable portion of the at-retirement market.

This is uncharted territory and I do not pretend to know whether this will ultimately end up as an expat market. What I do know is that some cutting-edge IFAs are having a long, hard look at the idea.

The best case scenario for UK IFAs is that British citizens planning to retire to the sun will be free to move their pension funds to the Isle of Man and enjoy the flexibility that many in the industry have long been calling for.

A worse outcome is that just as IFAs start moving their clients to Douglas, HMRC pulls the rug from under their feet. Given the potential loss of tax revenue, let alone the damage to the UK pension industry, this possibility cannot be taken lightly.

There are four eye-catching attractions to the way that pensions are being offered in the Isle of Man. First, residential property is to be allowed as an asset class, an idea that the UK Treasury considered and then dumped when it finally realised how much it would cost.

Residential property will be allowed provided that the investment is for the sole purpose of saving for retirement, the assets are at arm’s length, the scheme member will derive no direct benefit and it can be easily valued.

The Manx authorities have already received some proposals for approval, in anticipation of the new rules, where IFAs have wanted to put around 90 per cent of their client’s fund in residential property. These have been rejected but provided the investment makes sense within a portfolio, residential property will not be excluded.

Pensions will also have no requirement to buy an annuity at age 75. Instead, individuals will be allowed to remain in drawdown, with a minimum withdrawal of 35 per cent of GAD likely after 75.

The Manx government’s reasoning for this sounds fair enough. There are no life insurers offering annuities in its territory, so it would be illogical to require its citizens to buy such a product. Residual funds on death after age 75 will be taxed at 7.5 per cent in the Isle of Man rather than the punitive 82 per cent on those in alternatively secured pensions in the UK.

Tax-free cash is also made a little sweeter for those holding their pension funds in the Isle of Man. It will now allow 30 per cent of the fund tax-free rather than our 25 per cent.

These new benefits are so compelling that many UK IFAs are already looking hard at whether they can be used by investors retiring abroad. Pensions that are moved to the Isle of Man will be subject to 18 per cent local tax when they are in payment.

The question for expats will then be whether the country they move to will give credit for that when considering the income tax it will levy itself or whether, even with an 18 per cent hit, a Manx pension is worthwhile.

The holy grail would be for UK residents to be allowed to take their pensions to the Isle of Man or, better still, get the same flexibility while staying at home.

Loss of revenue means our Government clearly cannot let that happen. However, if the Isle of Man merely becomes the home of the pensions of the millions of high-earners planning to retire abroad in the next 20 years, the Treasury and UK pension industry stand to lose out.

All this means that IFAs advising anyone other than those becoming domiciled in the Isle of Man are going to need a crystal ball or an extensive reason-why letter.

John Greenwood is editor of Corporate AdviserMoney Marketing

50 Poland Street, London W1F 7AX


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