Is time running out for tax-free pension transfers?

By Kelman Chambers, Partner, Blevins Franks

If you have chosen to retire in Spain, take steps now to review your pension options before Brexit potentially changes the rules.

Many expatriates have chosen totransfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). SinceQROPS’ introduction in 2006,over £11.4 billion was sent through 128,100 transfers up to April 2019 – £640 million in the past year alone.

Transferring to a QROPS can consolidate several UK pensions under one tax-efficient roof suited to your country of residence and unlock other benefits. 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 and 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 most 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 £1.055 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 indeed 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.

Expatriates in Spain can escape this tax by transferring to a QROPS based here or in another EEA area, such as Malta. However, 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. Last year, economic secretary to the Treasury, John Glen, confirmed that tax-free exemptions would be "dependent upon the terms of future exit agreement between the UK Government and the EU".

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 expatriates in Spain comparable benefits to QROPS, so take personalised, regulated advice to establish the most suitable approach for you.

Pensionsare 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

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