Countdown on to review UK pension options before Brexit
After four years of uncertainty, we can now expect Brexit to start taking effect after the transition period ends on 31 December 2020. While nothing should change for UK nationals living in Spain until then, the countdown is on to prepare.
Once the UK sheds its EU obligations – including freedom of movement for capital – the government gains more scope to tax UK nationals abroad. Pensions are a likely target.
Transferring your pension abroad
Residents in Spain can currently move UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) free of any personal tax.
Doing this can unlock several advantages, such as consolidating several pensions under one roof, gaining flexibility to take your pension in the currency you need, and freedom to pass benefits to heirs other than your spouse. Once transferred, funds would be protected from UK lifetime allowance charges, as well as future changes to UK pension rules.
However, the UK imposes tax penalties of 25% on transfers to a QROPS outside the EU/European Economic Area (EEA). There are expectations that the UK may widen this taxation net to include EU/EEA-based QROPS once the transition period ends in December. This could be easily done since the UK legislation is already drafted to catch all pension transfers; the government would just need to remove the EU/EEA exclusion to make this happen. As such, time may be limited to transfer without tax penalties.
Pension transfers can take several months to process, so if you decide that transferring is right for you, act soon. The benefits of a QROPS can vary greatly between providers and jurisdictions, however, so take specialist advice to navigate the complex options and determine the most suitable solution for you.
Leaving your pensions in the UK
Of course, you could do nothing and access your UK pension from Spain. If you have a ‘defined contribution’ (‘money purchase’) pension, current options include taking cash, receiving a regular income (drawdown) or purchasing a lifetime income (annuity).
You cannot usually access ‘defined benefit’ (‘final salary’) pensions as cash; instead you receive a regular income throughout retirement. While you could transfer to a defined contribution scheme for more flexible access, this is likely to be less beneficial than receiving a guaranteed income for life.
Note that UK pension payments are usually only paid in Sterling. If you are living in Spain and your spending is in Euros, you could find that conversion fees and the variable exchange rate reduces the value of your pension income.
Remember also that UK pensions remain subject to UK rules, which can change at any time. UK funds are also vulnerable to lifetime allowance penalties of 25%/55% when combined pension benefits exceed £1.055 million.
Your pension is likely to be central to your long-term financial security, so it is crucial to proceed with care and take regulated advice. An adviser with cross-border expertise is best placed to help you establish the best approach for you and your family’s particular situation in Spain.
While there is no one-size-fits all answer for what to do with your pension, everyone can benefit from reviewing their arrangements as early as possible in 2020, before Brexit reshapes the landscape.
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.