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Home arrow Finance arrow Is time running out for tax-free pension transfers?
Is time running out for tax-free pension transfers?
Tuesday, 16 June 2020

Understandably during the global health emergency, normal life paused while priorities shifted. With all that’s been going on, it is easy to forget that the Brexit transition period is due to end in just a few months, on 31st December 2020.

Reassuringly, we know that if you are lawfully settled in Spain 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 could be potentially quite lucrative, for example, to tap into overseas pension transfers once they shed their EU obligations.

If you are retired or planning to retire in Spain, this is the time to review your pension options – before the rules potentially change.

The option to transfer overseas

Since QROPS’ introduction in 2006, 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 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 offer multi-currency flexibility, letting you hold and draw 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 limit, 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 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 applies a 25% ‘overseas transfer charge’ on the whole transferred amount.

Expatriates in Spain escape this tax by transferring to a QROPS based in an EU/EEA country. 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 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, 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. Note that the administrative process 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 – differences between providers and jurisdictions can affect the benefits. Alternative investment structures could offer comparable benefits, so take personalised advice to establish the most suitable approach for you.

 

Pensions play an important part in your long-term financial security, so use a fully authorised and regulated provider. Many people have lost retirement savings through pension scams or reinvesting in failed, unregulated investments that offer no protection. Your adviser should take into account your circumstances, income requirements, goals and risk tolerance – plus cross-border tax implications – to establish the right solution for you and your family.

 

Even if transferring is not right for you, now is the time to review your pension arrangements to secure the retirement of your choice in Spain, whatever Brexit brings. 

 

By Andrew Southgate, Private Client Manager, Blevins Franks
602 535 611

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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. All advice received from any Blevins Franks firm is personalised and provided in writing; this article, however, should not be construed as providing any personalised taxation and/or investment advice.

 

You can find other financial advisory articles by visiting our website here

 

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