Now’s the time to review your current options for UK pensions and consider benefiting from tax-free QROPS transfers – before Brexit changes the rules.
With the Brexit clock ticking, we have less than two-years’ certainty about the rights of expatriates in Europe. Take steps to secure your financial future by using this time to review the options for your retirement savings.
The option to transfer
Based on current law, Brexit should not change how you can access or transfer UK pension funds. Today, many expatriates choose to transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) to benefit from tax advantages and flexibility over UK pensions.
Once in a QROPS, funds are sheltered from UK taxation on income and gains and no longer count towards your lifetime pension allowance (LTA), enabling unlimited growth without attracting 55% or 25% LTA tax penalties. QROPS also provide greater investment diversification compared to UK pension schemes and more freedom to vary income. Whereas most UK pensions are payable only to your spouse on death, QROPS offer flexibility to include other heirs in estate planning.
Even if Brexit changes nothing materially regarding how we draw UK pensions in a European country, the income remains vulnerable to exchange rates. By offering multi-currency flexibility – letting you hold and withdraw your savings in different currencies – QROPS can potentially insulate pension income from volatility in the pound and euro.
A new QROPS tax
The ‘overseas transfer charge’ revealed in the UK Spring Budget may indicate things to come post-Brexit. Since 9th March, a 25% tax applies to UK pension funds transferred to a QROPS outside the European Economic Area (EEA), unless you live in the same jurisdiction. All other QROPS transfers (within the £1 million lifetime pension allowance) remain free of UK taxation.
Expatriates escape this tax if they transfer UK pensions to a QROPS based in the same country as them or in another EEA country, like Malta or Gibraltar. Take note, however, that liability lingers for a full five tax years after the transfer date. So if your circumstances change within that time to make you eligible for taxation – like moving outside the EEA – the UK taxman can still claim a quarter of transferred funds. This will not affect you if you transferred your pension before the new rules came into force on 9th March 2017.
Limited tax-free window?
By eliminating Britain’s EU commitments, Brexit offers the UK government more scope to recoup revenue from Britons abroad. Many speculate this will prompt further penalties on pension transfers, or trigger rule changes to make it harder to take advantage of today’s high transfer values for ‘defined benefit’ (final salary) pensions.
Until April 2019 – while Britain is still an EU member – little can change in the way you receive or transfer UK pensions. So if you decide that transferring is right for you, consider acting now, under current rules, before Brexit triggers change.
However, transferring is not suitable for everyone and differences between QROPS providers and jurisdictions could affect tax benefits. Alternative investment structures could offer expatriates comparable benefits to QROPS. Taking regulated advice is essential for protection from pension scams and to establish your most suitable approach to secure the retirement of your choice, wherever you may be.
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; an individual is advised to seek personalised advice.