HomeFinance Is time running out for tax-free pension transfers?
Is time running out for tax-free pension transfers?
Thursday, 17 October 2019
Andrew Southgate,Private Client Manager, Blevins Franks
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If you have chosen to retire in Spain, take steps now to review your pension options before Brexit potentially changes the rules.
With still no certainty on the timing and form of Brexit – be it hard, soft, no-deal or even no Brexit at all – it is difficult for 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, not even the UK government, 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 Spain, take steps now to review your pension options under current rules.
The option to transfer overseas
Many
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 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 £1.055 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 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 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.
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.
Tax rates, scope and reliefs may change. Any statements concerning
taxation are based upon our understanding of current taxation laws and
practices which are subject to change. Tax information has been summarised;
individuals should seek personalised advice.
You can find other financial advisory articles by visiting our website here
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