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UK Pension transfer – most common questions asked

By Chris Burke - Topics: Barcelona, pension transfer, QROPS, Spain, UK Pensions
This article is published on: 8th November 2019

08.11.19

Without even mentioning the ‘Brexit’ word, if you have a private or company pension scheme in the UK but reside outside, it’s a good idea to understand what your options are in managing and having access to them. There are a handful of subjects I am regularly asked about regarding this:

UK pension currency
If you transfer your pension outside of the UK, it does NOT have to remain in sterling; all major currencies are usually available. It can also be changed at most times and be held in different currencies. Of course, at the moment this is an even more important thought process for your retirement savings.

Access to pensions
From age 55 you can have access to as much of your UK pension as you like, although bear in mind that in Spain pension money will be subject to personal income tax, after any allowances. Therefore, you might want to arrange this so as to not incur higher taxes (there are several ways to do this).

Pensions from a previous employer
These pensions are known as dormant or frozen, and at the very minimum you should know what you have, where they are and how they work. We help clients track these down, explain how they work, what your options are and start planning to make them either more ‘healthy’ or easier to access. Some pensions may have high charges, or the pension scheme could be financially in trouble. Having all this knowledge as well as the options available will help you make an informed decision.

Can I transfer any pensions I have myself?
In short, if you are abroad, no, since the process is complex and not easy to understand if you are not in the financial world. Also, HMRC won’t allow it unless you have received advice. We have clients with different levels of experience in finance and pensions, and we work alongside them all closely, giving them the knowledge to make their decisions and managing the process for them.

If they are UK pensions and you want to keep them in the UK, then yes, you can usually do this yourself depending on the value involved.

You cannot transfer a pension to another person, although there are ways you can pass it on effectively.

Pensions transfer charges
When overseas pension transfers were started many years ago, the costs were a lot higher than running a UK pension scheme, although the benefits were greater. Now, with increased competition from providers, the charges for moving and maintaining an overseas pension are a lot lower. However, this does depend on who you perform the transfer with and what advice you are given. I still come across clients where the charges are so high it is almost impossible for the pension to grow. There are ways of helping these people, but usually by then they have lost out on many years of growth, which is really frustrating as it didn’t need to be that way. It’s so important you work with a Financial Advisor who is working for you, at your pace and advising in your best interests, not theirs.

Selecting a Financial Advisor to work with when investigating moving a UK pension
There are several points/questions you should check when deciding whom to seek advice from. These are:

1) Recommendations, you cannot beat them. Does anyone you know work with a Financial Advisor and they are happy with them?
2) Does the Financial Advisor have the necessary qualifications to give you advice?
3) How are they remunerated? Ask them how much and when.
4) Do they have any long-standing clients you can speak to? If they do and you manage to speak to them, ask them specific questions so you know they are both genuine and how it worked for them.
5) Look into their eyes… meet them several times, get a feeling for them as a person, their morals and actions.
6) Research them on the internet, or ask around and see what’s said about them.

I do know clients who have done most of this and still not had a great experience. The only additional advice I can give is to look at the pensions and companies they are recommending. If you haven’t heard of them before or you don’t get the ‘spider sense’ that they purely have your best interests at heart, then look elsewhere. Remember, they are going to be looking after your retirement. For years I have helped people evaluate their pensions, and as well as looking to help new clients, the main reason I write these articles is to help people avoid potentially working with someone that doesn’t have their best interests at heart.

UK State Pension for Expats

By Antony Poole - Topics: Costa del Sol, Spain, State Pensions After BREXIT, UK Pensions
This article is published on: 20th September 2019

20.09.19

The UK Government on the 1st of September 2019 announced that the UK state pension paid to Brits retired in the EU will continue to benefit from triple-lock until 2023.

This means that until 2023 the state pension paid to EU expats will increase by the higher of either 2.5 per cent, average wage growth or the CPI rate of inflation every year. The current new state pension for those who retired after 6 April 2016 is £168.60 per week, or £8,767.20 a year. It means that those living in the EU will see their pensions increase by almost £220 a year until 2023.

The main issue is that this uplift is not given to all expats; it is given to expats in certain countries, but not others, including Australia and Canada. The UK is almost unique in the EU in distinguishing between pensioners who are living in the country and those that are not.

The move has now opened the threat of removing automatic increases that expat pensioners receive as a result of Britain’s EU membership. The cost of the uplift to EU expats is estimated by DWP to cost around £500 million per year, which is a worrying statistic.

The three year extension, regardless of a Brexit deal or not, gives a temporary boost but no long term certainty.

The effect on your income by the freezing of the state pension can be reduced through a tailored savings strategy. Should you like a confidential financial review to maximise your options please contact Antony Poole.

Pensions, living and investing in Italy for UK citizens after Brexit

By Daniel Shillito - Topics: BREXIT, Italy, UK Pensions
This article is published on: 4th June 2019

04.06.19

As you well know, a stalemate has developed in the UK and recently claimed the scalp of the Prime Minister. What remains to be seen is whether a new leader can find an alternative solution that has sufficient support and which can create unity within the UK parliament and within the wider UK population.

Despite the EU and the UK government finalising a Withdrawal Agreement and the Political Declaration on a future relationship on 25 November 2018, the UK has not left the EU and the UK parliament together with the government now has until 31 October to finalise and advise their EU exit plans to the European Union.

In the meantime, both the UK and EU have made announcements on their ‘no deal’ preparations.
‘No Deal’ is not an outcome that either side wants, but is something that responsible governments ought to prepare for.

In case you didn’t know, the UK government provides specific information for British citizens living in Italy here.

In Italy last year on 21 December, the Italian government announced that it would be offering UK citizens certain residency rights in the event of no-deal, designed to ensure existing UK nationals in Italy will have the right and necessary time to obtain long-term residency status under EU directive 2003/109.

Here are some related questions and answers provided both by the Italian and UK governments to assist British citizens:

What do I need to do to prepare?
To be assured of the right to stay in the event of a no-deal scenario, it is essential that British citizens are registered at the local anagrafe office of the comune where they reside.

You can read up on the latest news about the Decreto Brexit, and how this bill protects the rights for UK residents in Italy to apply for Italian citizenship, as compiled and summarised by the British in Italy group, at their website, www.britishinitaly.net

How should I deal with my UK private pension?
If you have a personal pension (not state or public service occupational) and have not yet retired, think seriously about cashing it in if you’re old enough (take financial advice on the tax implications of cashing it in before doing so), or transferring it. A detailed pension analysis would be required to look at the suitability of doing so; however it might just be possible to remove your pension from future UK political uncertainty as it affects government regulations around pensions and their tax treatment, especially in a no-deal Brexit scenario.

I’ve thought about getting Italian citizenship, but will it affect by UK citizenship ?
Your UK citizenship is unaffected by any application for Italian citizenship. The UK permits dual-nationality.

What about the UK state pension ?
The UK government will continue to pay the UK state pension to those eligible after the UK leaves the EU.

Do I need to change the way I manage my pension and savings in Italy ?
Did you know that there are some large, household name UK financial institutions that offer products in Europe from countries like Ireland and Luxembourg ?

These products are both EU regulated and tax efficient in Italy.

As a result, should the UK leave the EU, you can still invest with companies whose names you know and trust, in a tax efficient manner, in the country you call home.

The UK leaving the European Union also will not change existing double taxation arrangements for UK nationals living in Italy.

For information and assistance about managing our financial affairs in Italy please contact the author below.

Does Qrops or transferring your UK Pension overseas work?

By Chris Burke - Topics: Barcelona, pension transfer, Pensions, QROPS, Spain, UK Pensions, United Kingdom
This article is published on: 4th March 2019

04.03.19

Those people who have a UK private or company pension and are resident outside of the UK, more often than not have the choice to transfer their pension to a QROPS (Qualifying Recognised Overseas Pension Scheme), that is the process of moving your pension outside of the UK. However, what are the important points to note with this, how does it differ from having your pension in the UK and most importantly, does it actually work effectively?

For just over 10 years you have been able to move your pension outside of the UK. Over that time, I have seen mixed success at doing this, with the companies providing this service changing, fees in essence reducing and the options of managing this growing. What has also changed is the benefit of doing this, alongside the advice you receive. Unfortunately, I have come across many cases where this has not worked well, and the reasons are nearly all the same: bad advice was given by the financial adviser who put their clients is funds/pensions that were overpriced and expensive.

To summarise, the current key potential benefits of Qrops would be the first step to seeing if this could be the right choice for you:

  • Pension potentially outside of future UK law changes
  • Brexit and the impact it would have on being a British person living in Spain
  • Potentially side stepping an expected 25% tax charge for moving pensions after Brexit
  • Currency fluctuation (ability to change your pension to euros when convenient)
  • Portability – the ability to move your pension in the future if needed
  • Potentially reduced tax liability
  • Inheritance – potential reduction of tax to beneficiaries or potentially lower tax on death (depending on your country of residence)
  • Peace of mind
  • Closer personal management of your pension
  • Tax efficient (working alongside a local tax adviser) potentially

And what are the key points that might mean Qrops is not right for you:

  • Returning to live permanently in the UK in the next five years (or maybe longer)
  • Pensions total value under £60,000 (the charges would be, in my opinion, punitive)
  • A company scheme where the benefits outweigh transferring
  • In the near future, wanting to take most of the money from your pension
  • Not having your pension in a Qrops managed well and expensively

From the perspective of access to your money, there is currently not much difference to having a personal pension in the UK or a Qrops. With the rule changes a few years back, you can, in essence, get access to your UK pension from age 55 in the UK and as much as you like, just as in Qrops.

Where Qrops really can help is moving an asset away from the UK and any potential rule changes, which have been regular over the recent years (mainly worse for the person owning a private pension). Couple that with Brexit and a potential 25% tax charge, then having your pension outside the UK will give you peace of mind in knowing exactly what the pensions rules would be for you moving forward. Also, given the fact that if you did ever move back to the UK (statistics show that for a British couple, there is a 75% chance one of you will go back at some point), you can transfer it back with you (there could also be tax benefits of doing this) and with some pension companies no charge.

However, perhaps the most important question is, does it work? The simple answer is yes it can, BUT it has to be set up the right way, with the right company and if you are given the right advice for what your pension is invested in. Basically, it needs to be done for your benefit, not so that the adviser can earn as much commission as possible from your pension.

Whenever I take a new client on, I always ask them if they would like to speak to an existing client to see what their experiences were, which is what I would do when performing my own due diligence.

If you would like to talk through any pensions you have and what your options are, feel free to get in touch and know that you will be given good advice, whether you become a client or not.

G transferred her pension 4 years ago; it has grown significantly over that time. “Chris has always been consultative and there when we need him.”

J transferred his pension 6 years ago. “It has grown well over that time. Whenever I have needed money from my pension Chris has arranged this for me. I would recommend him for sure.”

C transferred her pension 5 years ago. “It has grown steadily in that time (I am a cautious investor) and since then my husband and I have asked Chris to help us with our other investments.”

Retiring & income in retirement

By Derek Winsland - Topics: France, Pensions, QROPS, Retirement, State Pensions After BREXIT, UK Pensions
This article is published on: 8th June 2018

08.06.18

A major part of my role as a Financial Planner involves helping clients move towards retirement and advising those in retirement about the best and most tax-efficient way of generating their income once they stop work.

One question I’m often asked is how much money I should save to enable me to retire comfortably. A good question, it depends on what constitutes a comfortable retirement for that particular person. It’s generally quite a straightforward discussion: how much do you need now, and what will change as you approach retirement (mortgages redeemed, no more school or university fees, travel expenses to and from work for instance). Factor in extra expenses for pursuing hobbies, travelling etc. and we begin to build a picture of what retirement will look like and how long the active retirement period will last for.

In the UK, a Which? survey concluded that, in the UK at least, a couple entering retirement needed £26,000 a year to live comfortably. OK, that’s the UK and not necessarily representative of life here in France, but it is a basis for opening a discussion. The next consideration is to identify what the sources of income are – likely there will be an entitlement to UK state pension, possibly some French state pension and maybe rental income form letting out the old UK home, or Gites in France.

For those people actively thinking about and planning for retirement, it is also likely there will be some private pension provision, perhaps even membership of a final salary pension from time spent working for an old employer. And then there are the savings you’ve set aside for the day when you can put down those work tools, and say “That’s it, I’ve done my bit”.

But what income can I reasonably expect those savings to generate to supplement the other sources of income. The Institute and Faculty of Actuaries have ruminated over this question (well they would, wouldn’t they! I can imagine the topic of conversation going around the dinner table at their annual conference). The conclusion they’ve come to is (not surprisingly) based on the life expectancy of the retiree. Retiring at age 55, they believe you should draw down only 3% of your capital each year to ensure that your money doesn’t run out. This then rises to 3.5% if retiring at age 65. Other financial experts believe the figures could rise to 5% per year for a 65-year-old. This then assumes that your capital is invested to generate returns greater than the rate of inflation.

The options for the individual facing an income shortfall include:

    • Increasing your savings
    • Decreasing your retirement income expectation
    • Delaying retirement
    • Exploring alternative ways of investing available capital and pensions to obtain growth greater than inflation and certainly better than bank interest

A Financial Planner can draw up a future forecast using established assumptions for inflation, rates of investment return, the most tax efficient way of drawing down or generating income, using either life expectancy tables or any other age after discussing your family mortality history with you. This will give you your ‘number’, the amount of capital you’ll need to live comfortably.

The Office for National Statistics has recently launched an online tool on its website designed to tell you what your life expectancy is. If you’re curious, click here:

Once completed this Financial Plan should be implemented to address any recommendations for re-structuring the existing assets, and thereafter reviewed yearly, updating the investment returns achieved and the impact this has on the capital, checking any changes that need to be made to the assumptions and making any amendments that you want included. Long-lost pension funds will be identified, and the expected benefits brought into the plan, and again, any issues addressed. The move is towards handing the responsibility of retirement over to the retiree, so there is not a better time to consult a fully qualified financial planner.

If you have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

How Do I Find My Pension?

By Emeka Ajogbe - Topics: Belgium, Pensions, Retirement, UK Pensions
This article is published on: 19th April 2018

19.04.18

I have been asked this question, more than once. Some clients are embarrassed to ask. Others have simply lost sight of their pension for one reason or another and have no idea how to track it (or them) down.

Why am I telling you this? Well, recently the UK Government announced that there is over £400 million of lost pensions sitting with various pension and insurance companies in the UK – left behind by former employees who have either moved abroad, are unaware that they had a pension (it’s more common than you would think), or simply have not kept track of their pension. In fact, figures show that four out of five people will lose track of at least one pension over the course of a lifetime.

How can this happen?
It is surprisingly easy for people to lose track of their pension(s). Firstly, because people frequently move around for work. As the former Minister for Pensions, Baroness Ros Altmann said:

“People have had on average 11 jobs during their working life which can mean they have as many work place pensions to keep track of…”

That’s a lot of paperwork to keep on top of and to be fair, most people will only really think of their pensions when they are close to retirement. Which brings me to the second point.

We can and do lose contact with the companies which administer our pensions. The most common reason for this is that pension and insurance companies have merged, and hence brand names have disappeared. For example, a company called Phoenix Life owns more than 100 old pension funds. Its list includes schemes from Royal & Sun Alliance, Scottish Mutual, Alba Life, Pearl Assurance, Britannia Life and Scottish Provident. This invariably leads to a lot of frustrated people looking for their money. It will perhaps surprise you that neither the Association of British Insurers nor the Financial Conduct Authority have a comprehensive list of which company owns which funds.

OK, how can I track down my pension?
Glad you asked. We can help with that, of course. We would need as much information from you as possible which, depending on the type of pension, would include:

Personal Pension

  • The name and address of the pension scheme (you may find that this has changed)
  • The bank, building society or insurance company that recommended or sold the scheme
  • Policy/NI Number

Work Pension

  • The company you worked for and if they have changed names/address since you left
  • Dates you worked there
  • When you started contributing to the scheme and when you finished
  • Employee/NI number

Obviously, the more information that you can provide, the easier it will be to locate your money. However, we will work with what you’ve got to explore all possible options.

Some companies are more efficient and responsive than others when it comes to handling enquiries on historic pensions, even when the original policy documentation is available. It can take years to locate and recover lost funds. You can fight the battle yourself; or we can pursue on your behalf until we get a satisfactory outcome.

Another reason to review your work pension(s) is that transfer values for defined benefit, or final salary, schemes are at record highs. Depending on the company, valuations are higher than most people anticipate. For example, a pension projected to pay £8,000 per year could have a transfer value of over £285,000, well in excess the average house value in the UK!

I’ve got my pension(s). What next?
Depending on your age and circumstances, transferring an existing pension into a new scheme may be beneficial, including if you have more than one pension. Consolidating existing arrangements removes the need to monitor numerous pensions and, perhaps more importantly, allows you to optimise returns from a single, personalised investment strategy, often with greater flexibility over the timing and amount of payments and in your preferred currency.

Ahead of any potential transfer, the first step is to determine whether a transfer is in your best interests. A responsible adviser will always complete a detailed and objective review of your current position and plans. A transfer may not be appropriate, for a variety of reasons – for example if it means the loss of valuable guaranteed benefits – so it is essential to consult only a suitably authorised, qualified and experienced adviser. A proper assessment will enable you to make an informed decision on whether a transfer is best for you.

If you do proceed with a transfer, as part of the exercise you should also expect ongoing advice on matters such as investment performance and outlook, together with guidance on the suitability of the scheme following, or ahead of, a change in your circumstances.

For help with locating and reviewing your UK pension(s), please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

Taking a Lump Sum from your Pension when Resident in Spain

By Chris Burke - Topics: Barcelona, Pension Lump Sums, Pensions, Spain, UK Pensions
This article is published on: 13th April 2018

13.04.18

There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).

To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.

If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction. To clarify, it is the value the contributions have accumulated to today that is tax exempt, not the amount of actual contributions made back then.

From January 2007 there is no tax exemption, zero. Therefore, any contributions made from this point receive no tax exemption, however if the contribution to the pension runs before and after this date the tax exemption is calculated the same way.

If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £150,000
Amount to be taken in lump sum/one off: £50,000
Amount tax exempt in Spain: £20,000
Pension lump sum amount income taxable: £30,000 (added to your annual income tax band)


Now if we look at the UK example we shall see the difference:

Total amount of pensions: £150,000
Amount to be taken in lump sum: £50,000
Amount tax exempt in UK: £37,500
Pension lump sum amount income taxable: £13,000 (added to your annual income tax band)

 

However, in the following scenario the Spain example works more in your favour:

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £40,000
Pension lump sum amount income taxable: £60,000 (added to your annual income)

 

UK Example

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £25,000
Pension lump sum amount income taxable: £75,000 (added to your annual income tax band)

Important points to note here are:
If you cash in your UK pension OVER 25% and are registered in the UK as a non resident, an emergency tax code is likely to be used up to 45% and you will have to claim back what is owed to you. Unless you are able to provide a P45 from the current tax year following withdrawal from employment and/or current pension plan,

or

The pension provider already holds a P45 or up to date cumulative tax code received from HMRC as the result of previous withdrawals from that pension plan, and can apply it.

If you take your UK pension as a 25% lump sum, this should be declared in Spain and would apply to the Spanish rules of 40% being tax exempt and the rest income taxable. You would therefore pay any tax owed in Spain.

Only the FIRST Lump Sum is tax exempt so it’s important to realise that and make sure you plan effectively.

Regular payments from your pension fall under income tax

From 2007 onwards there is NO tax exemption of this kind.

Top Tips For Your Pension Lump Sum/One Off
When taking your lump sum, take it in the year that is most tax efficient for you, such as when you have lower income from other sources.

Moving your pension outside the UK could give you more freedom, more choices and potentially less tax to pay in the long term (depending on your situation).

Source: Silvia Gabarró GM Tax Consultancy Barcelona

Pension Commencement Lump Sum Tax in Spain – How does it work?

By Chris Burke - Topics: Barcelona, Pensions, Spain, UK Pensions
This article is published on: 16th March 2018

16.03.18

There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).

To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.

If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction.

If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions £150,000
Amount to be taken in lump sum/one off £50,000
Amount tax exempt in Spain £20,000
Pension lump sum amount income taxable £30,000 (added to your annual income tax band)

 

Now if we look at the UK example we shall see the difference

Total amount of pensions £150,000
Amount to be taken in lump sum £50,000
Amount tax exempt in the UK £37,500
Pension lump sum amount income taxable £13,000 (added to your annual income tax band)

However, in the following scenario the Spain example works more in your favour:

Total amount of pensions £100,000
Amount to be taken in lump sum/one off £100,000
Amount tax exempt in Spain £40,000
Pension lump sum amount income taxable £60,000 (added to your annual income tax band)

 

UK Example

Total amount of pensions £100,000
Amount to be taken in lump sum/one off £100,000
Amount tax exempt in Spain £25,000
Pension lump sum amount income taxable £75,000 (added to your annual income tax band)

Important points to note here are:
If you cash in your UK pension OVER 25% and are registered in the UK as a non resident, an emergency tax code is likely to be used up to 45% and you will have to claim back what is owed to you. Unless you are able to provide a P45 from the current tax year following withdrawal from employment and/or current pension plan,

or

The pension provider already holds a P45 or up to date cumulative tax code received from HMRC as the result of previous withdrawals from that pension plan, and can apply it.

If you take your UK pension as a 25% lump sum, this should be declared in Spain and would apply to the Spanish rules of 40% being tax exempt and the rest income taxable. You would therefore pay any tax owed in Spain.

Only the FIRST Lump Sum is tax exempt so it’s important to realise that and make sure you plan effectively.

Regular payments from your pension fall under income tax

From 2007 onwards there is NO tax exemption of this kind.

Top Tips For Your Pension Lump Sum/One Off
When taking your lump sum, take it in the year that is most tax efficient for you, such as when you have lower income from other sources.

Moving your pension outside the UK could give you more freedom, more choices and potentially less tax to pay in the long term (depending on your situation).

Source: Silvia Gabarró GM Tax Consultancy Barcelona

Trust in me!

By Gareth Horsfall - Topics: Italy, Trust Law, Trusts, UK Pensions
This article is published on: 13th March 2018

13.03.18
Trusts

Quite recently I was watching the Disney movie Jungle Book with my son. I am sure that you remember the film. You may also remember the snake in the film, named Kaa, who tries on a couple of attempts to eat the ‘man cub – Mowgli’. If you happen to watch the film again you will see that he sings a song to hypnotise Mowgli, that song is called ‘ Trust in Me’.

Like alot of things in life, there are things that trigger the grey matter to start working at a rapid rate and the lyrics to ‘Trust in me’ seemed to resonate with my grey matter on that day. It was all the talk of ‘TRUST’.

You may have been aware of all the talk of offshore trusts in the Panama Papers. Well, you will be grateful that I am not going to go into that in any detail because for most of my clients it has very little to do with them. However, what might affect you is if you hold a trust in the form of a pension, specifically a UK private pension, an IRA, 401K or other US based retirement fund and/or a trust which has been set up in another country which might have the objective of protecting your estate from inheritance tax and or using a trust to pass assets on to family members in the event of your death.

What is a trust?

A trust is basically an agreement between three parties:

    • The initiator of the trust (the settlor)
    • The trustee: the person responsible for looking after the assets on behalf of the settlor
    • The beneficiary: the people named in the trust agreement who are entitled to receive the property/assets of the trust

The trustee holds the assets, legally, on behalf of the ‘settlor’, who ensures that they are distributed in accordance with the settlor’s instructions. This can save time, reduce paperwork and in some cases avoid inheritance taxes. When something sounds this good, why haven’t we all got one? Because in Italy things are never that simple.

Trusts in Italy
Before I start with the analysis of how trusts are treated for taxation purposes in Italy, I would like to caveat this by writing that if you have a trust and are unsure of its tax treatment then you may wish to seek the advice of a trust lawyer who specialises in this field. The information I have learnt here covers a range of trust tax law, in Italy, which is specific to about 99.9% of clients, but it may not be appropriate for everyone. It is a very complicated area and may need specialist advice.

The issue of trusts in Italy was best summed up by an Italian lawyer who I was asking about this topic some years ago and I asked what is the law surrounding trusts in Italy His reply has stuck in my mind….”there is no real law of trusts in Italy because no one trusts anyone”. If you think about it, he is right. You are effectively giving your assets to another party, on the basis of trust, to distribute them on your behalf. That works well in the UK and the US where trust law is written into the framework of society and universally accepted. However, in Italy, where corruption, fraud and a slow legal system exist there would be little recompense if the ‘trusted’ individual/company ran off with your money.

Different types of trusts
There are many different types of trusts which can be used for various planning purposes but they are almost all unwritten by 2 basic concepts. This is that they are either revocable or irrevocable.

An irrevocable trust is simply a trust with terms and provisions that cannot be changed by the person who set it up (the settlor). This is distinguishable from a revocable trust, which is commonly used in estate planning and allows the ‘settlor’ to change the terms of the trust and/or take the property/assets back at any time in the form of income payments or lump sum withdrawals.

This concept of irrevocable and revocable trusts are the defining factors in the tax treatment of trusts in Italy and why, if you inherit a trust or you set one up before moving to Italy, then it is worthwhile checking to determine which type it is.

In general, the irrevocable trust (the one which CANNOT be modified by the settlor), in Italy, is respected for income tax purposes. The trust is deemed to be the owner of the asset (not the person) and there is a legally defined separation between the person who set it up ( the settlor) and the beneficaries of the monies from it. i.e the person who set it up can’t take money and income out at will and change the terms of the trust as and when they please. This is important in the tax treatment which I will explain below.

Conversely, the revocable trust is ignored for tax purposes and the ‘settlor’ is treated as the owner of the assets and any income from the trust, as if they still held them in their own name. The person who holds the trust is also responsible for disclosing the assets in it to the Agenzia delle Entrate each year, as if they owned them directly. Clearly this is not very tax effective in Italy.

Tax Treatment

The irrevocable trust is certainly the most tax efficient of the 2 types of trust and the easiest one to declare in Italy. The tax treatment is very simple in reality because the trust itself is not taxed, although it must be declared on the Quadro RW each year under the ‘monitoraggio’ section. (and your % share in the trust) Any income distributed from the trust is treated as the income of the individual in the tax year in which it is distributed and taxed at your highest level of income tax. (Capital Gains and non earned income tax of 26% do not apply to this type of financial structure)

The revocable trust, by comparison, is another beast altogether. This type of trust is generally looked through and the assets in it are deemed to be in the ownership of the individual directly.(the settlor). In other words any assumed tax protection by placing assets in trusts is removed because the trust itself can be altered. The Italian authorities have a number of provisions, which if written into the trust deed, could destroy the existence of the trust. These include:

  • The ‘settlors’ power to terminate the trust, causing a payment back to the settlor or the beneficiaries
  • The power of the settlor to name themselves as a beneficiary
  • Provisions which subject the trustee to consent or approval of the settlor i.e effective control of the trust by the person who set it up
  • The settlors powers’ to terminate the trust early
  • The provision granting a beneficary a right to a payment from the trust
  • The provision requiring the trustee to take instructions from the settlor for the purpose of administering the trust assets
  • The option to change beneficiaries
  • The settlors powers to distribute or lend income or assets from the trust to persons designated by the settlor
  • Any other provision, determined by the settlor or benficiary, which appears to limit the administration and distribution powers of the trustee

Assuming one of these provisions is written into the trust deed, then the protection of the trust invalidates the tax protection afforded by the trust and the assets will be subject to same rules as those assets which are held outside a trust.

Direct tax on assets in Italy is 26% capital gains tax and 26% on any income distributions/dividends or interest payments derived form assets, in the year in which they were realised. In addition a tax of 0.2% on the assets themselves as a wealth tax. The tax protection afforded effectively flies out of the window.

What are the alternatives?
For ultra wealthy individuals and companies there are always work rounds to these issues and with enough money you can pretty much construct anything these days to avoid taxes. However, this does not necessarily help the average person who would also like some tax protection for hard earned income and assets that you may wish to pass onto future generations.

The Investment Bond (Polizza Assicurativa Capitalizzazione) is a possible solution. It meets a number of similar criteria such as:

  • No Italian income and capital gains tax on the fund itself
  • Distributions are taxed at 26% on the proportional gain of the withdrawal (in some respects this is better than the irrevocable trust in which distributions are taxed at your highest rate of income tax)
  • The option to name beneficiaries in the event of your death
  • Continuation options in the event of death
  • The possibility of regular withdrawals and/or lump sum withdrawals and
  • A global range of investment options
  • Lastly, the investment Bond itself is fully reported to the Italian authorities and any taxes paid at source so you don’t have the worry of having to submit the information each year yourself or making mistakes

Summary
The lesson to be learned from this is, that before you do anything, if you have a trust, are a beneficiary of a trust, have set up a trust yourself or had one set up for you, then the first thing you need to do is get a copy of the trust deed and look at your relationship / level of involvement in the trust to determine exactly how it fits into your tax affairs as a resident in Italy. If in doubt, consult a professional.

I am going to elaborate on this subject of trusts in my next Ezine, specifically in relation to UK private pensions and US IRA’s and retirement funds. These vehicles themselves are set up as trusts and therefore have a specific tax treatment in Italy.

How safe is your UK pension?

By Chris Webb - Topics: Madrid, Spain, UK Pensions, United Kingdom
This article is published on: 9th February 2018

09.02.18

In days gone by the UK’s private pension schemes were the envy of the world, considered superior to other nations’ schemes. Alas, those days of world class company pension schemes are gone…………..

It is surprising just how many people are still members of their final salary or defined benefit schemes. Considered a “golden pension”, these schemes offer the best retirement promise, a promise to pay you the benefits that are defined in their pension schedule. Not a personal pension wholly dependant on the investments made, but a “fixed in stone” promise.

But how many of these people should be worried about how safe the promises are?

We recently witnessed the collapse of Carillion, a construction and outsourcing company with over 40,000 employees. They were just the latest in a high profile list of companies that have brought the subject of “pension safety” to the fore.

What happens to their workforce who are members of their pension scheme? The chairman of trustees of Carillion’s pension scheme, Robin Ellison, has suggested in a letter to a committee of MPs that there was a funding shortfall of around £990m with Carillion’s defined benefit pension scheme*. YES, £990 MILLION !!!

Many of the UK’s largest companies are running pension deficits that would bring a tear to the eye. The exact amount of pension deficit is hard to ascertain, but sources claim these numbers to be around £103 BILLION* with over 3,700 schemes in deficit compared to 1,800 in surplus.

Many household names find themselves in the same situation with their pension schemes. Names like BAE, Royal Dutch Shell, The Royal Mail and British Telecom to name a few. It is only a matter of time before one of these names, or another “big player” joins the list of collapsing pensions.

So, if you’re in a pension that is in deficit is that a problem? Well, there are close to 11 MILLION people holding defined benefit pensions. Out of that number they estimate that 3 MILLION (3) will encounter problems and potentially have only a 50% chance of receiving their promised pension.

The UK Government runs a special fund aptly called The Pension Protection Fund, the aim being to bail out companies with a pension crisis. The Pension Protection Fund (PPF) was set up on 6 April 2005 to protect members who had defined benefits (i.e. final salary type benefits) in a workplace pension scheme, where the employer became insolvent on or after this date and the pension scheme could not afford to pay those benefits promised to members on wind up.

Many smaller UK defined benefit pension schemes have already fallen into their basket, as well as some larger organisations. BHS and British Steel are two of the largest organisations to be in the pot. You can view all of the companies listed at the PPF website; it makes for horrid reading when you see the true amount of company pensions that have already owned up to and admitted they can’t afford to pay their promises………

The Pension protection fund isn’t exactly a guaranteed scheme anyway, whilst it runs within its parameters it can provide its own level of promises (below what the original pension company was offering), however if too many large company pension schemes start running to it for protection, it will put the protection fund under its own strain……

So what can you do about it?
Well, here at The Spectrum IFA Group we work closely with some of the worlds leading pension providers and can not only offer you completely independent advice but we can also provide you with a technical analysis on your pension. We can advise whether your pension is in deficit or surplus, we can advise on the pro’s and con’s of your existing pension provision and furnish you with sufficient information to actually understand what you may receive. We can also compare that information to the alternative options available to you, whether that be a transfer out of your scheme to a QROPS or an International SIPP option. This service is available for defined benefit and defined contribution (personal) pension plans.

It’s better to be aware of all the options available to you, it’s your retirement and it’s your choice to decide what the best option for your circumstances is.

*Sources: BBC News January 2018.