What are your UK pension options in Spain today?
Pensions are often the key to long-term financial security, so 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
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 – 25% will be tax-free in the UK.
• Make cash withdrawals when you want – a quarter is free of UK tax each time.
• Take regular income through ‘flexible drawdown’, leaving the remainder invested.
• Take a secure, regular income for life through an ‘annuity’.
Expatriates have the option to transfer UK pension funds to an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free. QROPS advantages include the flexibility to pass pension benefits to chosen heirs and take income in euros or sterling. 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. There is also a 25% UK tax charge on transfers to QROPS outside the EEA (European Economic Area). Many believe the UK government may start taxing EU/EEA transfers after Brexit, so if you are considering transferring, act sooner rather than later to avoid unnecessary taxation. First, take specialist advice to establish if transferring is suitable for you.
‘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’, 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.
While 25% of cash withdrawals can be taken tax-free in the UK, if you are non-UK resident they are usually taxable in your country of residency. 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.
Making your pensions last
If you do choose to take some or all of your benefits as cash, ensure you have a reliable plan to fund your long-term future that matches your personal circumstances and goals.
Avoid pension scams by making 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. Your adviser should take 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.
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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com