BBG member Jason Porter shares his insights on retiring to Europe and pensions
If, like many Britons currently in the Gulf states, you are considering retiring to warmer climes in Europe rather than the UK, it is sensible to review your pension options now, before Brexit potentially changes the rules.
Understandably during this global health emergency, normal life has been paused while priorities have shifted. With all that’s been going on, it is easy to forget that the Brexit transition period is still due to end in just a few months, on 31 December.
Reassuringly, we now know that if you are lawfully settled in your chosen EU country before then, you will be able to enjoy uninterrupted residence rights. But with no certainty on what form Brexit will take from 2021 – or whether the UK will even leave with a deal – there are still many unknowns.
Perhaps one of the biggest is what will happen to UK pension rules for expatriates. Looking at it from the UK government’s point of view, it presents an opportunity to extend the 25% exit charge to all overseas pension transfers, not just on those pensions transferred outside the EU.
If you are already retired or planning to retire abroad, this is the time to review your pension options – before the rules potentially change.
The option to transfer pensions overseas
Since QROPS’ introduction in 2006, many thousands of expatriates have chosen to transfer UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Transferring to a QROPS can consolidate several UK pensions under one tax-efficient roof suited to your country of residence and unlock other benefits. Once in a QROPS, funds are sheltered from UK taxation on income and gains, and immune to future changes to pension rules.
Usually, a QROPS provides greater investment diversification compared to UK pension schemes, with more freedom to vary income. Many also offer multi-currency flexibility, letting you hold and draw your funds in your currency of choice. Meanwhile, as UK pension payments are usually made in sterling, the income remains sensitive to volatile exchange rates during these uncertain times. And, while many UK pensions are payable only to your spouse on death, a QROPS allows you to include other heirs in estate planning.
Taxation of QROPS transfers
Currently, most expatriates in the EU can transfer to a QROPS completely tax-free, but there are two key situations in which tax is payable.
First, if your combined UK pension benefits exceed the UK’s lifetime allowance (currently £1,073,100) you would face a 25% tax penalty on anything transferred over the allowance even if you are non-UK resident. But once in a QROPS, funds would never be subject to lifetime allowance charges again.
The second taxable scenario is if, since 9 March 2017, you as an individual move outside the EU/EEA, or you transfer to a QROPS based outside the EU/EEA. In this case (unless you live in the same jurisdiction as the QROPS), the UK would apply a 25% ‘overseas transfer charge’ on the whole transferred amount.
Expatriates who transferred to a QROPS prior to this date, or who now move to the EU/EEA and transfer to an EU/EEA QROPS should avoid this charge, though this may change with Brexit.
A closing tax-free window?
As Brexit eliminates Britain’s current EU commitments – including freedom of movement of capital – the Treasury gains more scope to recoup revenue from UK nationals abroad. Many expect this will prompt the UK government to impose widespread penalties on pension transfers, even within the EU.
While the government has offered reassurance that expatriates will keep the right to make overseas transfers, whatever happens with Brexit, it has stopped short of making any tax promises. It is telling, however, that the legislation for the overseas transfer charge already includes the ability to capture all transfers – the government would just need to remove the EU/EEA exclusion.
What you need to consider
Without a guarantee that tax-free transfers will continue, it is sensible for anyone considering transferring to act sooner rather than later. Timing is especially important here as the administrative process for pension transfers can take several months to complete.
However, it cannot be overemphasised that transferring is not appropriate for everyone. Also, all QROPS are not the same – there are differences between providers and jurisdictions that can affect the benefits, and those with pre-existing QROPS should take up-to-date advice - the government have constantly tinkered with QROPS legislation, which has resulted in hundreds of schemes losing their QROPS status.. Alternative investment structures could offer expatriates comparable benefits to QROPS in their country of residence, so take personalised, regulated advice to establish the most suitable approach for you.
Pensions are likely to play an important part in your long-term financial security, so it is crucial that you only use a fully-authorised and regulated provider. An alarming number of people have lost retirement savings through pension scams or by reinvesting in failed, unregulated investments that offer no protection. Your adviser should take into account your unique circumstances, income requirements, goals and tolerance for risk – as well as the cross-border tax implications – to establish the right solution for you and your family.
Jason Porter is a Director of specialist expat financial advisers Blevins Franks, which has been rated Best Overall Adviser Firm in the ‘International Adviser’ magazine best practice awards. Jason is the co-author of the book ‘Retiring to Europe’.