Is time running out for tax-free pension transfers?
If you are already retired or have chosen to re-
tire in Spain, take steps now to review your pen-
sion options before Brexit potentially changes the rules.
The option to transfer overseas
Many expatriates have chosen to transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Transferring can consolidate several UK pensions under one tax-efficient roof and provide greater investment diversification than UK schemes, with more freedom to vary income. Many QROPS also offer multi-currency flexibility to hold and draw your funds in your currency of choice, thereby minimising exchange rate risk. And, while most UK pensions are payable only to your spouse on death, a QROPS lets you 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 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. While expatriates in Spain can escape this tax by transferring to a QROPS based here or in another EEA area, such as Malta, 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.
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 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, this is a good 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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com