With still no certainty on the timing and form of Brexit it is difficult for British expatriates to plan accordingly. We are often asked, for instance, what will happen to UK pension rules for expatriates after Brexit, but the reality is that no-one knows for sure.
However, when it comes to rules for expatriate pension transfers, it is likely that things may change. So if you are already retired or planning to retire in Mallorca, take steps now to review your pension options under current rules.
The option to transfer overseas
Many British expatriates have chosen to transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Since QROPS’ introduction in 2006, over £11.4 billion was sent through 128,100 transfers up to April 2019 – £640 million in the past year alone.
Transferring to a QROPS can consolidate several UK pensions under one tax-efficient roof suited to your country of residence and unlock other benefits. 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 and 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 most 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 UK nationals 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 £1.055 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, such as Malta. 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.
The UK government has offered reassurance that expatriates will keep the right to make overseas transfers, whatever happens with Brexit – but has stopped short of making any tax promises. Last year, economic secretary to the Treasury, John Glen, confirmed that tax-free exemptions would be “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, 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. Alternative investment structures could offer British expatriates in Spain comparable benefits to QROPS, 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 take personalised advice from an experienced advisory firm. 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 Mallorca, whatever happens with Brexit.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
To keep in touch with the latest developments in the offshore world, check out the latest news on Blevins Franks Tax & Wealth Management Specialists.
Related articles to tax for foreigners living in Spain.
Blevins Franks Mallorca specialises in giving advice for tax-driven, wealth management investments. […] Blevins Franks Tax & Wealth Management Specialists
Will your estate and heirs benefit from the new £1 million nil rate band? Find out all you need to know about recent changes to UK inheritance tax here. […] Will you benefit from new inheritance tax reforms?
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists. This promotion has been approved and issued by BFFM.
This article was written on the 1st of October, 2019.