Tax Free Pension Transfers - is time running out?
Insights on the implications of Brexit on QROPS from Blevins FranksWhile much of the world's focus has been on the global health emergency caused by Covid 19, other issues may have faded to our mental background. But with Brexit fast approaching, now is the time to look at your pension options and bring that financial planning to the forefront. While much is still unknown, now is the time to future proof your pension as much as possible before the rules change.
The article below, by Dan Henderson of Blevins Franks outlines some issues to bear in mind. Blevins Franks is a leading tax and wealth management consultancy for UK nationals in Europe, providing expert advice on international tax issues and estate planning. Their expertise can save you money and help safeguard your financial wellbeing. With offices in Loulé, they offer integrated tax and financial services to expats living in Portugal.
Check out this very useful and informative video by Blevins Franks regarding Brexit, the current situation and what future negotiations may look like.
Is time running out for tax-free pension transfers?
By Dan Henderson, Partner, Blevins Franks
This article was originally published by Blevins Franks
Understandably during this global health emergency, normal life has been paused while priorities have shifted. With all that’s been going on, it is easy to forget that the Brexit transition period is still due to end in just a few months, on 31 December. Reassuringly, we now know that if you are lawfully settled in Portugal 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 already retired or planning to retire abroad, this is the time to review your pension options – before the rules potentially change.
The option to transfer overseas
Since QROPS’ introduction in 2006, many 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 suited to your country of residence 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 also offer multi-currency flexibility, letting you hold and draw your 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.
While you can escape this tax by transferring to a QROPS based in an EU/EEA country, 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 post-Brexit, 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. Timing is especially important here as the administrative process for pension transfers can take several months to complete.
However, 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 expatriates in Portugal 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, with still so much uncertainty ahead, now is the time to review your pension arrangements so you can secure the retirement of your choice in Portugal, whatever Brexit brings.
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 document, 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 www.blevinsfranks.com
You may also like:
- A Guide to Non-Habitual Residency tax scheme
- Changes to the NHR
- Preparing your finances for the unexpected
- Looking after your financial wellbeing
- Portugal Tax