With the Brexit clock ticking, there are just months of certainty left for British expatriates living in Spain. If you have chosen to retire here, take steps now to review your pension options – before the rules potentially change.
The option to transfer overseas
Many expatriates have chosen to transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Since QROPS were introduced in 2006, £10.77 billion had been sent through 123,100 transfers up to April 2018 – an average of £898 million per year.
Transferring to a QROPS can consolidate several UK pensions under one tax-efficient roof suited to your country of residency. Funds are sheltered from UK taxation on income and gains, and no longer count towards your lifetime pension allowance (LTA), enabling unlimited growth without attracting 55% or 25% LTA tax penalties.
Usually, a QROPS provides greater investment diversification compared to UK pension schemes and more freedom to vary income. And while most UK pensions are payable only to your spouse on death, a QROPS allows you to include other heirs in estate planning.
A QROPS can also offer protection from the risk of a no-deal Brexit ‘cliff-edge’ for pensions, where some UK providers will lose the legal right to pay personal pension benefits to expatriates (unless new post-Brexit arrangements are agreed). Funds already transferred to a QROPS will be unaffected.
In any event, as UK pension payments are usually made in sterling, the income remains highly sensitive to volatile exchange rates during these uncertain times. Many QROPS offer multi-currency flexibility, letting you hold and draw your funds in your currency of choice.
Taxation of QROPS transfers
Currently, most expatriates 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 at £1.03 million – you would face a 25% tax penalty on anything transferred over the limit, even if you are non-UK resident. Once in a QROPS, your funds would never be subject to LTA charges – or indeed any UK taxes – again.
The second taxable scenario is if you transfer to a QROPS based outside the EU/EEA (European Economic Area). In this case (unless you live in the same jurisdiction as the QROPS), the UK would apply a 25% ‘overseas tax charge’ on the whole amount transferred.
Expatriates in Spain can escape this tax by transferring to a QROPS based here or in another EEA area, like Malta andGibraltar. However, this may change with Brexit.
A closing tax-free window?
As Brexit eliminates Britain’s current EU commitments – including freedom of movement for capital – the Treasury gains more scope to recoup revenue from UK nationals abroad. Many speculate this will prompt the UK government to impose widespread penalties on pension transfers, even within the EU. Another concern is that the UK government could change the rules to make it harder to take advantage of today’s high transfer values for ‘defined benefit’ (final salary) pensions.
The UK government has offered reassurance that expatriates will keep the right to make overseas transfers, whatever happens with Brexit – but it has stopped short of making any tax promises. According to economic secretary to the Treasury, John Glen, “whether or not these transfers will be exempt from the overseas transfer charge once the UK leaves the EU is dependent upon the terms of future exit agreement between the UK Government and the EU.”
What you need to consider
Without a guarantee that tax-free transfers will continue beyond next March, 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, transferring is not suitable for everyone and differences between QROPS providers and jurisdictions could affect the tax benefits. Alternative investment structures could offer expatriates comparable benefits to QROPS, so take personalised advice to establish the most suitable approach for you.
As pensions are likely to play an important part in your long-term financial security, it is crucial that you only use a fully authorised and regulated provider. An alarming number of people have lost some or all of their 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.
Even if transferring is not right for you, with so much uncertainty ahead, now is the time to review your pension arrangements so you can secure the retirement of your choice in Spain, whatever happens with Brexit.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 1st of October, 2018.