Pensions are often the key to long-term financial security, so it is crucial to take extreme care when deciding what to do here. Expatriates have the added complication of factoring in the tax rules of two countries, as well as the potential for Brexit to limit the range of opportunities. So what are today’s options for Britons living in Spain?
Defined contribution’ or ‘money purchase’ pensions
This category includes most personal and employer pensions and Self-Invested Personal Pensions (SIPPs). Here, what you are entitled to depends on how much you have paid into the scheme alongside employer contributions, tax rebates and investment growth.
Since the pension freedoms of 2015, members of defined contribution schemes can usually do the following from age 55:
• Take the whole fund as cash, technically called the ‘Pension Commencement Lump Sum’ (PCLS) – 25% will be tax-free in the UK.
• Make cash withdrawals when you want – a quarter is free of UK tax each time (unless you have already taken the PCLS).
• Take regular income through ‘flexible drawdown’, leaving the remainder invested.
• Take a secure, regular income for life through an ‘annuity’.
As UK pension payments are usually paid in sterling, conversion fees and variable exchange rates can reduce the value of income for retirees living in Europe. A no-deal Brexit may even prevent UK pension providers from legally paying benefits to British nationals in the EU.
Expatriates have the option to transfer UK pension funds an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free. QROPS advantages include the flexibility to pass pension benefits to chosen heirs, take income in euros or sterling and more investment choice. Once in a QROPS, funds are protected from future UK taxation, including lifetime allowance penalties.
However, QROPS benefits and rules vary significantly between providers and jurisdictions. Also, a 25% UK tax charge applies on transfers to QROPS outside the EEA (European Economic Area). Many believe the UK government may tax EU/EEA transfers after Brexit, so if you are considering transferring, act sooner rather than later to avoid unnecessary taxation. First, make sure you take specialist advice to establish if transferring is suitable for you and navigate the complex options.
‘Defined benefit’ or ‘final salary’ pensions
Here, your employer guarantees a proportion of your salary for the whole of retirement. While you cannot usually withdraw cash from this type of pension, you can transfer it to a defined contribution scheme or QROPS. Traditionally, this has been considered less beneficial than drawing a guaranteed pension for life. However, some providers have been offering higher than usual ‘transfer values’ to reduce their future pension liabilities, sometimes representing hundreds of thousands of pounds. Sensibly reinvested, a high one-off sum could potentially provide a retirement income that exceeds the original annual payment, but it is crucial to fully understand the consequences before giving up lifetime benefits.
In any case, you should consider various issues before making pension decisions.
While 25% of cash withdrawals can be taken tax-free in the UK, if you are Spanish resident they are usually taxable in Spain, as is other UK pension income.
Spanish residents accessing UK pensions or QROPS income will attract Spanish general income tax. Rates vary regionally, but generally start at 9.5% and reach up to 48%.
The exception here is UK government service pensions – including teachers’, local authority, army, police and civil service pensions – which remain taxable in the UK only (although the income is included when calculating your Spanish final tax rate).
For the best results and to avoid an unexpected tax bill, take specialist, cross-border advice before making any pension decisions.
Making your pensions last
Having the freedom to withdraw or transfer your pension does not mean that you should; you may be better off taking no action at this time. If you do choose to take some or all of your benefits as cash, make sure you have a reliable plan to fund your long-term future that matches your personal circumstances and future goals.
Beware that pension scams have never been more widespread and sophisticated – generally, if an investment sounds too good to be true, it probably is. Make sure any company you are dealing with regarding pension services is regulated with the UK Financial Conduct Authority (FCA). Remember: unprotected investments risk losing your money, with no compensation if things go wrong.
Even amongst regulated providers, check for quality. The FCA found that less than half of those transferring final salary pensions received suitable advice. Make sure your adviser takes account of your needs, objectives, personal circumstances and risk appetite to find the best solution for you and your family. Getting it wrong could have serious and unexpected consequences.
Take care to explore your options now – before Brexit potentially changes the landscape – to establish your best approach for a prosperous retirement in Spain.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 4th of February, 2019.