Concerns over effect of BREXIT on expat pensions
The decision by UK voters to leave the European Union could have far-reaching consequences for pensioners living abroad.
This is especially the case for those receiving UK state pensions, but who are living in another EU member state.
The main uncertainty is whether state pensions will continue to benefit from annual increases.
As at September 2014 there were 1.24 million people receiving British state pensions but living outside the UK.
Approximately 560,000 expat pensioners live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the amount it was when they left the UK.
Is it going to be the case that British expats living in EU countries such as France or Spain will find themselves in a similar position?
Since 1955, pensions have been paid worldwide, but there was never any mention of annual increases.
However, in the period to 1973, reciprocal arrangements were made between the UK and 30 other countries, which allowed for annual increases to be paid in certain countries. This was seen as making it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.
Very few new agreements have been signed since, possibly because the EU rules meant that there was no need for them between EU countries.
Pensioners living in the EU, Norway, Iceland and Liechtenstein do get increases, but there is no guarantee that this will continue following Brexit.
Inevitably, the UK government will be tempted to save money by ending the increases to pensioners living in the EU.
It is already estimated that the Treasury saves around half a billion pounds a year from pensioners excluded from the increases. This could easily double if pensioners in the EU were to be treated similarly.
The number of overseas voters still on the UK electoral register is negligible, so the government might decide that upsetting these people would have a very modest negative effect. One result could be that more expats would get themselves back on to the UK electoral register (if it were possible for them to do so).
There is also the question of people who are planning to retire to a EU country in the future. They might show their dissatisfaction at the ballot box.
Another reason for the government might not stop the increases is the possibility of large numbers of pensioners living in the EU finding that they have no choice but to return to the UK
If access to free healthcare in the host country was also abolished, the UK government could easily find that significant numbers of pensioners return to the UK, which is a situation it would want to avoid.
For this reason, it is to be hoped that state pension increases will be paid, and there will almost certainly be considerable pressure on the government to find a way to preserve the existing system.
The New UK State Pension
The new UK State pension scheme has now come into effect from 6th April 2016. Widely publicised by the government as being easier to understand, based on the questions we are getting, this is not the case!
If you reached State Pension Age (SPA) before the start of the new scheme, then you are not affected by the changes – even if you have decided to defer taking your State pension. Under the ‘old scheme’, the basic State pension is £119.30 per week for 2016/17, based on having 30 years of National insurance Contributions (NICs) or credits. You may also be entitled to some additional State pension and the amount varies according to your earnings during your working life and whether or not you were ‘contracted-out’ of the State Earnings Related Pension Scheme (SERPS) or the later State Second Pension (S2P). The maximum additional pension entitlement is around £164 per week.
The new State pension scheme introduces a ‘single-tier’ pension of £155.65 per week for 2016/17, based on having 35 years of NICs (or credits). So anyone starting work today, who retires with a 35-year NIC record, can expect to get the full amount of the single-tier pension and nothing more. Of course, this is subject to the rules not being changed for the next 35 years!
However, for people who have already built up a NIC record before 6th April 2016 and have not yet reached SPA, the transitional arrangements are complex. Some will get more than the single-tier pension, others will get less, and here is where the confusion begins!
If you fall into this ‘transitional group’, as a first step, your State pension under the old system is calculated as at 5th April 2016. This includes your basic pension plus any additional pension that you are entitled to receive and this known as your ‘Starting Amount’. You cannot get less than this amount.
So even though you may not have 35 years of NICs, it could be that under the old system, your Starting Amount is actually more than £155.65 per week. If so, you will receive the higher amount, but you cannot build up any more State pension, even if you continue to pay NICs. The difference between your Starting Amount and the single-tier pension is known as your ‘Protected Amount’ and this will be increased by reference to inflation.
However, there are many people who have a Starting Amount that is less than £155.65 per week. Typically, these are people who were contracted-out of the additional State pension scheme and thus, paid a lower rate of NICs and/or do not have the 30 years of NICs required under the old scheme. Hence, many of these people are asking if they should pay voluntary NICs to increase their State pension entitlement up to the single-tier amount.
For those over age 55, it is possible to get an estimate of your new State pension entitlement from the Department of Work & Pensions. One of my clients (let’s call her Jane) did this recently.
Jane has paid NICs for 25 years before coming to live in France. She has about 10 years to go until she reaches SPA and before the new scheme was introduced, she had planned to pay 5 years of voluntary NICs to secure entitlement to the full basic State pension, but to do this closer to her retirement. However, now she is 10 years short of the full 35-year record and so she is not sure now what she should do.
The letter that she received from the DWP confirmed that she was entitled to a State pension in the new system of £138 per week, based on her existing NIC record to 5th April 2016. As she only had 25 years of NICs, around £96 of this was basic pension and £42 was additional pension.
Under the new State scheme, you get £4.44 per week for each year of NICs (£155.65 / 35). Jane thought that she needed to pay 10 years of NICs to get the full single-tier pension of £155.65. However, this would add £44.40 per week (£4.44 x 10) to her Starting Amount, resulting in a total amount of £182.40. As this is greater than £155.65, the excess would be lost. Therefore, the maximum amount that Jane can purchase is £17.65 per week and so she only needs to purchase 4 years.
To purchase extra years, you have to pay voluntary Class 3 NICs and the rate for 2016/17 is £14.10 per week. A full year of NICs at this rate of £733.20 would increase your State pension by £230.88 per annum. In effect, this is not a bad ‘annuity rate’ and one has to question whether or not such generosity from the government is really sustainable over the long-term? A problem to be faced by a future government and not the current one!
In Jane’s case, it is 10 years until she will receive her State pension and we have seen constant change in the UK pensions arena – last year the major reform in private pensions and now the reform of the State pension. It cannot be ruled out that more changes will take place in the future, particularly as concerns the period needed to qualify for full pension and the age at which the State pension starts. There is every possibility that Jane could pay the voluntary NICs now, only to find that the ‘goalposts’ are moved again during the next 10 years.
Everyone’s situation is different. Hence, whether or not it is a good idea to pay voluntary NICs to increase your State pension will vary from one person to another. In any event, such a decision should only be considered as part of a wider review of your overall financial situation and taking into account other retirement provision that you already have in place.
If you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at email@example.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the UK State pensions system, the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter
For people in all walks of life, retirement can be an uncertain prospect. At the very least it raises all kinds of questions concerning personal financial stability and the maintenance of living standards.
For those whose work takes them to a number of different countries during their career, the uncertainty is increased.
Until recently, retirement plans have traditionally offered a restrictive and inadequate package which was expensive to implement and complicated to arrange.
Most people require a simple yet flexible retirement benefits package, offering the possibility of a secure and prosperous retirement. An investment programme that allows you to decide exactly what you want and when you want it, how much and which type of protection you feel is appropriate for your own personal circumstances.
A plan where you can have the flexibility to take it with you from employer to employer and country to country, where you can increase or decrease or even temporarily suspend payments. You want to choose at what age you wish to retire and choose how you wish to receive your money upon retirement.
Flexibility and choice are the key words to most people when they start a retirement plan. Gone are the days when you worked for one company for 40 years, religiously paying into the company pension scheme. It is each individual’s responsibility to make sufficient provision for their retirement and which route to take to achieve future financial security can be a complicated search of bewildering facts and figures when comparing products available.
To get personal and confidential advice regarding your retirement provision, it is necessary to discuss your own individual future financial needs, together with your full financial planning objectives.
Retiring in Spain with a UK State Pension – How does it work?
Many people understand that the UK is in the EU (for now at least) and therefore when you retire, it should be simple to understand how you claim your State and personal pensions. The main questions people have are what pension will you receive, how will you receive this, where should you be paying your taxes and how when retired, can you receive your pension in Euros and what could happen if you don’t have this organised correctly?
Over the last few years this has changed and, as of now, works in the following way.
Never worked in Spain but retiring here
In this scenario, having never paid Spanish taxes you will receive the UK State pension by contacting the HMRC on the following links:
How to check what State pension you have
How the State Pension works
How the new state pension will work
How to claim your state pension online
Early retirement and State Pension
You will be able to find out exactly what you will be entitled to and how it works. UK State pensions are always paid gross and never taxed, it is your duty to report this in your annual earnings whichever country you are resident in and along with your income, pay the relevant tax. State pension does come under the tax bracket as income tax.
You can choose to have your UK State pension paid into a UK bank account in sterling, or into a Spanish account in Euros at the rate of exchange that day (i.e. almost no costs for doing this).
If you have a private or company pension scheme in the UK, you should register on the following link and make sure this is also paid gross to you:
Then, you should be declaring this income in your annual tax return here in Spain (Declaracion De La Renta) and pay the relevant taxes, it’s advisable to find a good gestor to guide you.
A word of note here, unlike in the UK where your accountant/tax advisor is accountable for the advice they give you, here in Spain YOU are liable, even if the advice you are given is wrong. This stems back from Spanish culture, which you may remember when you learnt Spanish that they say in essence ‘The pen fell from my hand’ whereas in English we would say “Oops, I dropped the pen”.
Worked in Spain & the UK, Retiring here
In this scenario, as the UK is part of the EU, you should approach the local tax office in Spain and inform them of your situation. They in turn, would then contact the other countries you have worked in and where you paid tax and National Insurance contributions. This would then be paid to you by them directly as they collect from the relevant countries.
Different countries have different ages that they start paying your State pension from, so you need to bear that in mind.
Failure to correctly declare your pension income
What if you are or planning to be a resident here in Spain, but collect your UK state and private pension directly from the UK and do not declare here and in essence pay no taxes here? Surely, as the UK and Spain have a Double Tax Treaty (DDT, which means that you will not pay tax twice on any income you receive) as long as you are paying tax somewhere it’s not a problem? Well, consider that you are living in Spain as a resident, using their services, taking advantage of the healthcare and all the other things that make living here so enjoyable. Yet, you are paying UK taxes even though you are not living there. As you can see this doesn’t seem right! And it isn’t! Therefore, if you are found declaring your income incorrectly, it could result in you being fined, maybe even substantially. What is more, there is usually a minimal difference in the tax you might pay, whether it be in the UK or here, depending on your situation and income.
Also, give the fact that WILLS have now changed as of last August, meaning in essence you can choose which jurisdiction (country, laws) your estate would apply to, there seems little reason to risk this and not declare and pay your taxes as they should be. It would certainly stop a nasty knock at the door at some point down the road, especially as of next year when Common Reporting Standards come into rule (CRS – where countries around the world will be sharing information on the finances of their passport holders) meaning it’s even more likely you could be ‘found out’. Please note, this does not change where you are taxed for succession issues.
Therefore, we recommend making sure you are doing things properly, whether this involves you declaring this yourself or through a gestor, as well as making sure your WILL is up to date.
UK Pension Tax Changes 6th April 2016 (lifetime allowance)
Anyone who has a private or company pension in the UK could be affected by the changes being brought in on the 6th April this year. This may be anyone with private pension(s) whose combined value is around £1,000,000, or a company pension scheme which would give an income in retirement of approximately £40,000 per annum.
In essence, the changes affect the tax you would pay on this money. Up until now, any pensions combined under £1,250,000 in real value would not be subject to any further taxes than those of normal income or inheritance tax. However, any pension with a value higher than this would be subject to additional taxes. This allowance is called a ‘Lifetime Allowance’ (LTA). The tax on pensions over this value can be up to 55%.
As from April this year, this Lifetime Allowance Value is being reduced to £1,000,000. Therefore, any pensions combined worth more than this would now be liable to these potentially additional taxes.
If you have a Corporate, Company, Final Salary or Defined Benefits Scheme this will also be tested against the new Lifetime Allowance. These Schemes are based on your final salary when leaving your employer as opposed to contributions and investment growth, and the amount usually has to be multiplied by a factor of 20 in order to calculate the capital equivalent value. These Schemes also usually pay a tax-free lump sum, and this also has to be included in the LTA calculation. Therefore, depending on the pension(s) this new limit may affect you.
What are the key factors involved in the Lifetime Allowance testing?
Retirement after age 55: Once a lump sum/income is taken from a Pension, these are tested against the LTA.
At age 75: Any Pensions that have not been accessed will be tested against the LTA at this time. Pensions in drawdown will also be tested again at this time.
Death pre-age 75: Pensions will be tested against the LTA to ensure that the limit has not been exceeded.
Transfer to a QROPS (Qualifying Recognised Overseas Pension Scheme – when you transfer your pension outside of the UK): If a UK Pension Scheme’s funds are transferred into a QROPS, the value of the transferred funds are tested against the LTA.
Of course, the main point here for many people is death before age 75. If this happens, as is stands your pension will be subject to this potential tax from £1,000,000 and above.
What are the tax charges?
If the Lifetime Allowance is exceeded, then the tax charges will depend on how the excess is paid from the Scheme.
If as a lump sum (normally the case in inheritance): subject to a 55% tax charge.
If as a Pension Income: subject to a 25% tax charge.
Transfer to a QROPS: subject to a 25% tax charge on the excess above the LTA.
Is there any protection against Lifetime Allowance charges available?
The UK Government has confirmed that from April 2016, the following two protection regimes will be available, allowing individuals a fixed or individual LTA dependent on the value of their Pensions and/or the type of protection:
Fixed protection 2016: This ‘fixes’ the LTA at the current £1.25m. In order for this to apply, no further Pension benefits can be accrued in a Scheme on or after 6 April 2016.
Individual protection 2016: The LTA will be set at the value of the Pension on 6 April 2016, when the new £1m LTA is introduced, so long as it is valued between £1m and £1.25m. This protection does allow further contributions, but any Pension in excess of the protected LTA will be taxed on the usual way when tested.
What about a transfer to a QROPS/Overseas pension scheme?
This currently enables an individual to safeguard their Pension Fund against this tax charge and allows the fund to carry on growing. As detailed above, the fund is tested against the individual’s Lifetime Allowance at the point of transfer, rather than at the point of each pension being tested as per above scenarios, i.e. death before pension accessed etc.
Perhaps the most important information to know regarding this, is that not so long ago the Lifetime Allowance for pensions was £1,800,000 in the UK. It is consistently reducing, which is worrying considering every twenty four years historically inflation doubles, and yet the Pension Lifetime Allowance is dramatically being reduced instead of increased, such as the tax bandings for income tax have been after years of lobbying by the general public. This could lead us to one main conclusion, the UK governments’ need to collect more and more taxes. Therefore, as the years pass by it could be this differential continues to grow and grow, in real terms meaning individuals will pay more and more tax.
The key points to consider with this are:
Having your pension(s) in the UK will enable them to be liable to the UK rules and the government’s ability to change them, including the uncertainty of what these changes may be in the future.
The Lifetime Allowance is consistently decreasing, meaning taxes are consistently increasing.
Understanding of these changes and how it might affect you could save you or your loved ones considerable money in potential taxes.
If you have no plans to retire in the UK and have pensions there, it could be worth having these evaluated to see whether it would be beneficial for you to transfer them securely outside of the UK.
Talking your personal circumstances through will put your mind at rest, or enlighten you on what your options are and how you can best plan for this eventuality.
If you would like to ask any questions regarding this subject, or speak to Christopher, a UK pensions expert who wrote this article, feel free to contact him on the details below.
To QROPS or Not?
The rapidly changing landscape of pension schemes in the UK has led to a great deal of confusion, and it’s not just UK pensioners who are affected. The rule changes also impact expats living outside the UK, especially those considering the benefits of a Qualifying Recognised Overseas Pension Scheme (QROPS).
As an expat, it’s hard to know which route to take. Should you transfer to a QROPS or leave your pension in the UK? What are the benefits and drawbacks? What impact have recent changes had on your options?
Let’s look at the QROPS facts…
- Up to 100% of the pension pot is available, depending on the jurisdiction. 25% could be tax-free if you are UK resident but could be taxable if resident outside of the UK.
- Uncertainty of more UK tax changes, with several ideas being muted which all in essence make you liable to pay more tax or have less allowances on your pension.
- No pension death tax, regardless of age, in Gibraltar and Malta.
- Greater investment freedom, including a choice of currencies and investments which could make a difference to the amount of money you receive.
- Retirement from age from 55.
- Income paid gross from Malta (with an effective DTT), and only 2.5% withholding tax in Gibraltar.
- Removal of assets from the UK may help in establishing a Domicile outside of the UK (influences UK inheritance tax liability).
What will happen if you leave your personal pension in the UK?
- On death over the age of 75, a tax of 45% on a lump sum pay-out.
- Income tax to be paid when receiving the pension, with up to 45% tax due, likely deducted at source.
- Registration with HMRC and the assignment of a tax code which could start as a higher emergency tax code.
- Proposed removal of personal income pension allowance for non-residents. Although this is still on the agenda, it has been confirmed that there will be no change to non-residents’ entitlement to personal allowance until at least April 2017.
- Any amounts withdrawn will be moved into the client’s estate for IHT purposes, if this is retained and not spent.
- As the client will be able to have access to the funds as a lump sum, these could potentially be included as an asset for care home fees/bankruptcy etc.
What Does All This Mean?
Regardless of the proposed legislation amendments, transferring to a QROPS still provides certain benefits that the UK equivalent would not be able to offer, although it’s fair to say that both still hold a valid place in expatriate financial planning. The answer to which pension is more suitable for you will ultimately depend on your individual circumstances and long term intentions. It is vital you talk to a Financial Adviser who can advise you correctly on this.
Why a Pension audit is vital for your wealth. (Part 2)
In the previous article, I referred primarily to Pre-Retirement Planning. This article is devoted to Post-Retirement Planning ie. when you are already drawing your pension and are tax resident in Spain. For those that are lucky enough to be in receipt of a Defined Benefits Scheme (ie Civil Service / Company Final Salary Pension) most of this article will not apply to you. The same applies to those taking income from a SIPP/ Drawdown plan. This will be covered in a future article.
Primarily this article deals with “Money Purchase Arrangements” ie. Group or Personal Pensions, Stakeholder Pensions and Contracting Out of SERPs, where benefits are being taken and the tax free lump sum has been paid.
It is important to understand the taxation of income in Spain. Unlike the UK, “Earned Income” and “Capital Gains and Investment Income” are not added together to determine the highest rate of tax payable. They are kept separate with “Earned Income” taxed at the highest marginal rate, and “Capital Gains and Investment Income” capped at rates of between 20%, 22% and 24% for the tax year 2015. When one considers a person that has a State Basic Pension of £8,000 p.a. and Earned Pension Income of £12,000 (with the current rate of exchange of 1.4) it is quite easy to slip into the next highest rate of marginal tax of 31% for “Earned Income”.
One also needs to consider the rules for Lifetime Annuities by the Spanish Law “Renta Vitalicia” and its subsequent tax treatment of said income.
So why the need for a Pension audit when one is already receiving it and declaring it to the Hacienda? Are you paying too much tax as a result of the word Pension?
So does this apply to you? Possibly, and the likely reason why, is that your pension provider at retirement converted your pension to an annuity. You may have taken all the pension pots, used an open market option and transferred this to another annuity provider that offered better rates?
It is also vital to understand both the documentation sent by the UK provider on an annual basis and the treatment of pensions and annuities by the UK HMRC. Unlike the Spanish, the UK HMRC treats both pensions and annuities as one, and they are taxed under income tax rules. It is vital that this is understood. Even if you have previously informed the provider that you are living in Spain and are receiving your pension gross, due to UK HMRC rules, you will still receive a “P60 End of Year Certificate” from the provider. This clearly states under the heading “Pension and Income Tax details”.
In these cases you could be paying too much tax without realising it! As an honest citizen, one presents the P60, without having the original policy document translated into Spanish, to your local Abagado / Gestor, who in turn presents the documentation to the Hacienda. It is hard enough for them to fully understand English, let alone the tax laws relating to the UK re. pensions and how they differ to Spain. The same could be said if one is receiving advice from a UK based adviser or an “Offshore Adviser”, who are very unlikely to understand or be able to assist with the complexities of Spanish Tax law.
And the reason for this is that Spain’s tax rules treat the purchase of a Lifetime Annuity as “Investment Income” even when a “Pension Pot” is used. The full income tax law is LEY35/2006 de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (LEY IRPF) The specific part relating to the taxation of Annuities is found in Articulo 23 as follows:
- The taxation of lifetime annuities– Articulo 25.3 a) 2º LEY IRPF
- The taxation of temporary annuities – Articulo 25.3 a). 3º LEY IRPF
Instead of being taxed on the full income amount, a discount is applied based on the age of the recipient when the original annuity was purchased. So for someone between the ages of 60 to 65 at the time of purchase, this represents 76%. Therefore referring to the above example the taxable “Investment Income” is only £12,000 x 24% = £2,800. The £2,800 will then be subject to the lowest “Investment Income” rate of 20% (assuming no other income) ie. tax payable of £576 p.a. A very substantial saving when compared against being taxed under “Earned Income” rules. For ease, I have not calculated the rate applied if one moves into the next highest rates of marginal tax!
I have come across a number of clients in this exact situation and I am in the process of correcting this error. Already one client has had a rebate, backdated 4 years (due to the statute of limitations) and now pays substantially less tax as a result. But it is both time consuming and hard work having to track down the likes of Pearl, Equity and Law, Equitable Life, Commercial Union, Scottish Equitable, Sun Life, Clerical Medical and Eagle Star (to name but a few) who were the major providers of pensions in the 80’s and 90’s, and then confirm it was a Lifetime Annuity that was purchased.
This is further complicated by those in Final Salary Schemes like the Teachers Superannuation Scheme, who at the same time contributed to the Group AVC, and considers that the pension income comes from one source. There is the possibility that the AVC under a default process purchased an Annuity offered by the same provider.
This is a service provided for existing clients, although at some stage they will need an official translator to translate the documents into Spanish if the UK provider will not do so.
In some instances though, either because of a lack of understanding by 3rd parties ie. the Hacienda or a Gestor, some people are claiming their pension income from a QROP/ SIPP as a temporary annuity whilst still retaining control over the investment and have not actually used cash to purchase an annuity ie it is still a pension in drawdown.
This is incorrect and will be explained why in a later article. Further articles will also include “The Treatment of Small Pension Pots”, “Pensions Flexibility” and “Pensions in Drawdown”. What I have learned time and time again over the course of many years experience in the pensions industry is that the “Devil is always in the detail” and why a pensions audit is vital.
As Financial Advisers we are not professional tax advisers, but we work closely with said professionals, and in this instance the tax advice has been provided by HCS Accounting of Denia
Why a Pension audit is vital for your wealth Part 1
I have been trained in the UK and have been specialising in Pensions since 1987. As well as keeping up to date with the subsequent (and numerous) changes in legislation, I also have a good understanding of the variety of pensions offered since then. In this article I am concentrating on Pre-Retirement Planning ie. those people that have yet to take their pensions. With ever changing careers in private industry and the end of the idea of “jobs and pensions for life”, which was part of the revolution in the late 70’s, most people acquire a number of pensions and different types of pensions over a period of 30 to 40 years. In some cases, they are not even aware of their entitlement, in particular, Defined Benefits Schemes to which the rules changed from the late 80’s (my Father in Law being a case in point who was not aware he was entitled to benefits under such a scheme until well into his retirement) and Contracting Out of SERPs plans.
Since the Finance Act of 2004 pensions have come under that legislation. The general wording of this legislation was “Pensions Simplification”. As advisers at the time, we knew full well that this would not be the case and we have been proven correct, with the subsequent attacks on pensions by a variety of governments seeking to raise revenue and reduce tax advantages at the same time.
Since moving here to Spain, I have come across many clients who were not aware of the benefits that they were entitled to. It has required a vast amount of work tracking down both providers and employers that no longer exist. In some instances it has proved to be fruitless, but others have benefited from plans that they are not aware of. That is the first stage of my role as a Financial Adviser, which is to question a potential client’s work history and seek full details. That however is the easy bit as the options available at retirement have been given greater flexibility, but the irony is that independent advice is hard to come by in the UK unless you are prepared to pay a fee on a time cost basis.
The first question is, do you plan to become tax resident in another European country? For those that plan to still maintain a home in the UK (even as a holiday home), that is further complicated by ever changing rules regarding residency in the UK vs tax residency in the chosen country.
What do you need to do before you leave the UK and become tax resident in an EU country? A simple question perhaps, but the tax free lump sum available in the UK now referred to as “Pension Commencement Lump Sum” or PCLS (one can see the tax free status of that being restricted in the future) is liable to be taxed certainly in France and Spain once you become tax resident. There are legitimate rules reducing this, but once again, these need advice. How does one therefore get your PCLS to take advantage of the current UK tax free status, without having to take the pension too? Perhaps you want to stagger your pension income as a result of continued part time work or “consultancy”. Many of my generation want to still work past normal retirement age, but at a slower pace.
Currency also has an impact, within the last 5 years the £ to the € has gone from 1.07 to 1.42 Euros. If one thinks that will be maintained, consider that in 2002 when the Euro was launched the £ to Euro was as high as £1 to 1.56 Euros. The impact to those that budgeted on that basis over the ensuing 8 years was detrimental to their wealth, so how does one hedge against currency fluctuation?
Does all your pension come from a UK source or have there been earnings and pension entitlements from overseas employment? Do you have a mixture of Final Salary schemes and personal money purchase pots? Is there a need to consolidate these, or treat each individual arrangement on its relative merits?
With recent legislation, trustees of Final Salary schemes (Defined Benefits), with the exception of transfers less than £30,000, now need the involvement of a fully qualified UK financial adviser who has passed his recent exams. This is all very laudable but how can that adviser be aware of the tax rules in your new country of residence? In any analysis carried out by a Spectrum Partner, it is vetted and checked by a Spectrum Fully Qualified Chartered Financial Planner, and if need be by a UK Financial adviser if part of your pots are as above. It is important to note that no UK Government funded pension eg. Civil Service can be transferred.
Then there is the reduction in the Lifetime Allowance, the passing of your pension pot to your chosen heirs and beneficiaries, the correct selection of good quality properly regulated funds and fund managers dependant on an individual needs, regular reviews as needs change, and the changes to the amount one can take on an annual basis due to recent pension flexibility rules. These are all areas that are vital to consider.
Even after the audit, and a decision to potentially transfer part or all of one’s pots, care needs to be taken in the selection of the QROP/SIPP Trustee and the jurisdiction that it comes under.
Having mentioned the above it may be in some cases that not all your pension pot should be considered for a transfer.
It may be beneficial to consider the purchase of a Lifetime Annuity from a UK provider as these have substantial tax advantages over pension payments in Spain. This will have to be carried out before one moves abroad on a permanent basis and, as stated earlier, for every potential client advice is given on a case by case basis.
In many cases, a lifetime of pension saving can result in funds being equal to or greater than the value of a property purchased abroad. Should one not take the same planning, care, advice and due diligence when planning your retirement for an income that may have to last 30 years? That is where we can be of help.
QROPS – Qualifying Recognised Overseas Pension Schemes
I’d like to revisit the topic of pensions this month; specifically QROPS pensions. I’m sure you remember that it stands for Qualifying Recognised Overseas Pension Schemes. I spend a lot of time talking to clients these days about QROPS. I don’t want to bore you with loads of technical detail here; I want to concentrate on the core reason why you should consider a QROPS if you are non UK resident or are considering becoming so. Much has happened this year in the UK pensions industry, and it has tended to cloud the picture regarding expats and their retirement savings. Let’s try to regain some clarity.
If you’ve moved to France, or are considering a move here, you need to at least consider a QROPS as an option. It gives you the right to move your pension fund out of the UK jurisdiction altogether, and have much more control over your pension pot, and protect it from internal taxation and other forms of interference from the UK system which is focussing more and more on how to tax your assets.
I’m talking to a client in this position at the moment. His name isn’t Steve, but we’ll call him that anyway. He has a £400,000 pension pot made up of four different pensions accrued over his working life. He and his wife are UK resident, but intend to be French resident soon. I’ve given him all the background information, and he has come back with a very succinct question:
‘I think it quite likely that I will live in France for many years, but equally likely that I will return to the UK at some stage in the future. As my pension will revert to UK jurisdiction when that happens, is it worth my while paying the overseas trustee fees while I am outside the UK?’
Steve is 65 years old, and he thinks he will return to the UK when he is 80. Let’s also assume a modest net return of 5% per annum of the QROPS pension. This of course cannot be guaranteed, but is the current performance of my preferred investment fund over the past 5 years. Let’s assume that he decides to do a QROPS transfer.
Now let’s move forward in time by 10 years. Steve’s pension fund is now worth £550,000. (the mathematicians amongst you will of course realise that he has been drawing down some of this pension to supplement their other sources of income) He’s quite pleased with this, but would be less pleased to learn that in two weeks’ time he will be killed in a tragic car accident.
As tends to happen in later years, Steve and his wife had discussed what they would do if one of them died. Steve thought that if he was the one left, he would stay in France, but his wife, we’ll call her Jane, thought it more likely that she would go back to the UK to be with the children and grandchildren. This is indeed what Jane decides to do, and to facilitate this, she decides to take the full pension pot as a capital sum to enable her to buy a decent house back in Cambridge. She will invest the proceeds of the sale of the French house when, and if, it sells.
Because Steve decided to transfer under the QROPS system out of the UK pension jurisdiction, Jane will get every penny of the £550,000 pension lump sum. If Steve’s decision had gone the other way, and he had decided to keep his four pensions in the UK, Jane would be looking at a tax bill from HMR&C of 45% on the majority of the money if she took it as a lump sum. Her tax bill would be in the region of £210,000 at current rates.
There will have been additional costs in having a QROPS pension, principally to remunerate the overseas trustees who take on responsibility for the administration of the pension under HMR&C rules. There will also have been savings. UK pension funds are subject to UK Dividend Income Tax. The rebate of the 10 per cent credit (ACT) was withdrawn by Gordon Brown, costing pension funds billions in tax.
It is therefore difficult to quantify how much extra a QROPS costs, if anything at all. What we can say with a fair degree of certainty is ‘not as much as you might think’. In Steve’s case it probably cost about £9,000 over the ten years in trustee costs, but £8,000 of this was recovered immediately when he invested his pension money into the QROPS bond. That doesn’t happen with all QROPS, but it can currently with Spectrum.
As far as insurance goes, and I regard this as an insurance policy for while you are abroad, the cost/savings ratio looks pretty impressive. I always practice what I preach; my own pension fund is safely housed in two separate QROPS, well away from the UK tax–grabbers.
With regard to the changes that have erupted on the UK pensions scene this year – Pension Freedom – as the chancellor likes to call it; I think my views are well documented. I see this as a tax raising scheme, nothing more and nothing less. It may be that in the future QROPS schemes will be forced to fall in line with the new UK stance, but that has little to do with the many compelling reasons to look at a QROPS transfer.
QROPS is one of the topics that we will be featuring at our next ‘Le Tour de Finance’ seminar. Our industry experts will be presenting updates and outlooks on a broad range of subjects, including:
- Financial Markets
- Assurance Vie
- Structured Investments
- Currency Exchange
The date for the seminar is Friday, 9th October 2015 at the Domaine Gayda, Brugairolles. Places are limited and must be reserved, in advance. This venue is always very popular and so early booking is recommended. Please complete the reservation form here
What is QROPS?
A QROPS (Qualifying Recognised Overseas Pension Scheme) is an overseas pension scheme that meets certain requirements set by HMRC and follows the same standards or equivalent as a UK pension.
Most expat UK pensions can easily be transferred into a QROPS, as long as the overseas scheme is registered with HMRC and is fully compliant with the standards of the jurisdiction it is domiciled in. QROPS’ profile was increased after HMRC introduced a series of new pension rules on 6th April 2006.
• Putting your pension into a QROPS will give you a greater level of control over the way your pension fund is invested. You can consolidate a number of different pensions into one QROPS pot and you will not have to buy into an annuity.
• QROPS will also let you bestow the rest of the fund to your beneficiaries without any deduction of UK tax upon death, as long as you have spent five years or more living outside the UK.
How secure is your pension? The global recession and credit crunch have created a lot of concern about investments. And for most people pensions involve very large investment decisions. You could already be receiving a pension income, but is it working hard enough for you? Or are you one of the many people with a deferred pension. There can be risks involved, even with final salary schemes. Falling stock markets and increased life expectancy have put a great strain on these schemes with most being closed to new members. We recommend that all expatriates with a UK pension review their fund carefully, and consider all the options. Particularly as non-residents have the opportunity to move their UK fund to an international pension.
What is an International pension? New UK legislation has created international pension products known as Qualifying Recognised Overseas Pension Schemes(QROPS). In essence, QROPS must mirror the UK requirements for pension commencement lump sum and income benefits. HM Revenue & Customs (HMRC) will only allow overseas transfers to schemes that have an official QROPS status. Careful consideration needs to taken when considering a transfer, as HMRC are aware of some jurisdictions promoting the scheme as a blatant way of tax evasion (ie Singapore, which was delisted by the HMRC in 2008).
We work closely with the authorities concerned to help our clients be placed in the most appropriate jurisdictions.
So what are the benefits of QROPS?
• Potential freedom from UK tax upon death, even after the age of 75 (Finance Act 2008)
• Transfer of the fund to future generations upon death with the potential avoidance of current UK tax charge on residual fund. If the member is over the age of 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
• Flexibility to access funds at any time between the ages of 55 and 75.
• Access to income and capital without deduction of tax.
• No deduction of tax at source. However, taxation may apply in the member’s jurisdiction of tax residence.
• Reduction of currency risk by transferring the funds to Euros, for example if a client lives in Europe and will be spending Euros in their daily lives.
• No requirement to buy an annuity
Example when QROPS is a good idea
A Client is aged 65 and lives in France and has done so for more than 5 full UK tax years.
The client has no intention to return to the UK.
The client wishes to take the maximum Pension Commencement Lump Sum (PCLS) and immediately draw an income from the remaining pension fund.
The existing UK pension scheme is a Money Purchase Scheme and does not have any guarantees attached to it. The client is being charged 1% per annum plus annual fund management charges by their UK provider and the pension has a transfer value of £200,000.
In the event the client passes away they wish their pension fund to pass as a lump sum to their spouse. Were they to pass away after age the age of 75, the fund would be subject to a 45% UK tax charge before being passed on to their widow/widower. (from 2016 both income or lump sum benefits would be taxed at the beneficiary’s marginal rate of income tax).
Following a detailed analysis of their UK scheme, including the cost and tax implications, the client decides to go ahead with a transfer under the QROPS provisions to a Malta registered and recognised provider.
The QROPS costs are £645 for the set up fee and £845 per annum (in some cases these fees can be less).
The investments are administered for a cost of 1% per annum plus annual fund management charges.
The client receives 30% of their pension pot as a PCLS, which is taxed in France at a rate of 7.5%. Had the client left their pension in the UK, they would be able to take only 25% PCLS and it would still be taxed in France. He then draws an income of 150% of UK GAD rates, which is paid to them gross by the Maltese QROPS provider, as Malta has a Double Taxation Treaty in place with France.
Then they declares this income on his French Tax return. The funds used in their portfolio are all purchased without initial charges or commissions.
These funds are all daily traded and none are subject to any penalty charges if they are sold. The funds purchased to provide income are managed by some of the very top investment houses in the business; for example, BlackRock, JP Morgan Asset Management , Jupiter Asset Management, Kames Capital and Henderson Global Investors.
• The additional costs are only the £645 set up fee and an £845 annual charge.
• The client has been able to withdraw an additional 5% of the fund as a PCLS. • Upon death the client’s pension pot will pass in its entirety to their widow or widower. • The client is able to mitigate potential currency risks. • Increased Flexibility (i.e. a normal Personal Pension Plan does not allow drawdown) • Consolidation of pension plans making them easier to manage
Example when QROPS is not a good idea
A client has a Section 32 pension. • The client is coming up to retirement age, they do not live in the UK and have no plans to return.
• The client’s main requirement is a high income and as they have no children they are not so worried about the death lump sum.
• Having analysed the pension we find out that it provides a Guaranteed Annuity Rate (GAR) of 8.7% per annum for life. (Note* this is not the case with every Section 32 pension).
• Our view is that this is a very good income rate, especially when compared to current annuity rates which are very low.
• Transferring to a QROPS would mean this GAR is lost and then any future income will be based on normal income drawdown rules.
Therefore we recommended that this particular client should leave the pension where it is in order to enjoy this high guaranteed income rate.
Our advice would not always be the same for every client as there would be restrictions to when annuities could be taken, the spouse’s benefit would have been minimal and there also would be no death lump sum for any other beneficiaries. So this solution would not be ideal in every case.
A client’s aims and objectives will drive the advice as for some people it may have been better to transfer this plan. This is why we fully review each individual pension plan and discuss with our clients what the benefits are, what the options are and what might be best for them depending on whether they require a higher lump sum, higher income, better spouse benefits, better death benefits for children, require income earlier than age 60, as many GARs are only applicable at age 60 etc.
The importance of each factor will vary depending on whether a client is married, has other income or cash available, has children, whether they are divorced and re-married, their risk profile etc.
Other reasons not to transfer:
• Fund value below £50k – expense ratio too high.
• Final Salary – the client wants the stable income with inflation increases and is happy for the pension to stop on the death of both the client and their spouse.
• Guarantees attached. – The pension has a Guaranteed Annuity Rate (GAR) or Guaranteed Minimum Pension (GMP) – i.e. the annuity could be in the region of 8-10% for life or the client could have a guaranteed income which is also in this region. (although with the latter the fund growth can increase to make the guaranteed income less attractive, you don’t know until retirement date, with the annuity you always get the % so if the fund goes up the % stays the same.
• The pension has an enhanced lump sum.