I am moving to Spain and I want to make UK personal pension contributions
Is this permitted and what are the restrictions?
Will I still receive tax relief?
Moving to Spain & UK pension contributions
I am moving to Spain and I want to make UK personal pension contributions
Providing that you are a relevant UK individual (definitions below) then you can continue pension contributions for up to 5 full tax years after the tax year you leave the UK. This means that, even if you have no UK earnings once you leave the UK, you can continue to pay up to £2,880 a year (currently), with a gross pension credit of £3,600, for 5 full tax years after leaving the UK. There are more details on how you qualify to make contributions in the text below taken from HMRC’s Pensions Tax Manual. Importantly, any contributions must be made to a plan taken out prior to leaving the UK. In other words, you cannot open a new UK pension plan having left the UK.
We have solutions for people who have left the UK but continue to work and wish to fund a retirement plan. We also help clients position their existing pension funds in the most tax efficient way, creating flexibility whilst providing access to investment experts to maximise the benefits you will receive.
Relevant UK individuals and active members*
Section 189 Finance Act 2004
An individual is a relevant UK individual for a tax year if they:
- have relevant UK earnings chargeable to income tax for that tax year,
- are resident in the United Kingdom at some time during that tax year,
- were resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme, or
- have for that tax year general earnings from overseas Crown employment subject to UK tax (as defined by section 28 of the Income Tax (Earnings and Pensions) Act 2003), or
- is the spouse or civil partner of an individual who has for the tax year general earnings from overseas Crown employment subject to UK tax (as defined by section 28 of the Income Tax (Earnings and Pensions) Act 2003)
Relevant UK earnings are explained under Earnings that attract tax relief in the above tax manual.
Members who move overseas
An individual who is a member of a registered pension scheme and is no longer resident in the UK is a relevant UK individual for a tax year if they were resident in the UK both:
- at some time during the five tax years before that year
- when the individual became a member of the pension scheme
These individuals may also qualify for tax relief on contributions up to the ‘basic amount’ of £3,600.
*Source UK government
To find out if you qualify and an explanation of all your pension options, including pension transfers, SIPPs, QROPS, and income drawdown, tax treatment of pensions in Spain, and to find out how you could make more from your money, protecting your income streams against inflation and low interest rates, or for any other financial and tax planning information, contact me today at firstname.lastname@example.org or call or WhatsApp (+34) 618 204 731.
State Pension Benefits
If you have moved from one country to another, while it may be comparatively easy to obtain tax advice in order to help you plan your finances, it can be very difficult to find out how your State Retirement Pension will be affected, and this has become more uncertain as a result of Brexit.
This article aims to shed some light on the issue.
I retired in the UK and moved abroad
Let’s start with something easy – if you have already retired and moved to France, Spain or another EU country, the chances are you will only have a State Pension from the UK. With Brexit in mind, as long as you are legally resident in your new home country by the end of 2020, nothing will change and you will be entitled to the annual pension uplift indefinitely.
Coupled to this is your entitlement to healthcare, in that you will have a form S1 from the UK, which ensures you benefit from full care on an ongoing basis, and which in effect will be paid for by the UK Government.
If you have already left the UK but have not yet reached formal retirement age, as long as you are ‘legal’ in your adopted home before the end of 2020, you will receive the UK State Pension at retirement age and qualify for annual increases. You will also be entitled to a form S1.
Note that, if you have not regularised your situation in your adopted home by the end of 2020, the situation is uncertain, to say the least. You will be entitled to claim the UK State Pension when you reach retirement age, but the uplifts are only due for 3 years and, most importantly, form S1 will not be available; but the situation may change – the Brexit negotiations seem to have stalled due to the Coronavirus Pandemic and no one knows what the final agreement will look like, especially when it comes to freedom of movement and the rights of third country nationals.
I left the UK 5 years ago at the age of 55 and have been self-employed in France for the last 5 years
Have you been making voluntary contributions to the UK scheme? Are you making contributions in France?
If you haven’t already done so, obtain a pension forecast from HMRC – use the gov.uk website, sign up for the Government Gateway access service, and check your National Insurance Contribution records, as well as your UK tax records. You’ll have to apply to contribute, using form CF83 attached to the booklet NI38, Social Security Abroad.
You will then be told what pension you can expect at your retirement age, and you can also see how many incomplete contribution years you have. It is generally good advice to continue to make voluntary contributions after leaving the UK (currently £795.60pa), but if you are currently self-employed, you will only have to pay at the Class 2 rate, £158.60pa for the current year.
You’ll receive details of how to make up the shortfall, by bank transfer or cheque for past years, and by direct debit for the future if you wish to see payments taken automatically. Importantly, you can also call to obtain advice concerning whether it would be worthwhile doing this, and how additional payments will increase your pension entitlement – it might take a while to get through, especially due to the current Coronavirus lockdown, but you should find the staff helpful when you do.
Also make sure you understand what your French contributions entitle you to and try to obtain a projection of your future pension in France. This might prove difficult at present, with offices closed or providing limited services.
Having worked in the UK, Italy and now in Spain, I want to claim my State Pension
The first thing to understand is that you should retire formally in the country you are currently living in, unless you haven’t made any pension contributions there – in which case you apply to the last country in which you contributed.
So, in this case, you approach the Spanish authorities and will have to provide details of all your employment and self-employment history. Spain will then check with each country concerned (the EU-wide scheme ensures this is possible – work history outside the EU means you may have to apply individually to those countries) and will calculate your entitlement.
They will do this by adding together the contribution years of each country and then applying this to their own pension rules. Don’t forget, official retirement age can vary in different countries, and some state pensions are more generous than others. A second calculation is made, whereby all the individual pension entitlements are worked out, and the totals added together. Then they will award you the higher of the two figures, and will handle payments to your bank account, obtaining reimbursements from the other countries involved, according to your previous contribution records.
So, you do not have to have the minimum contributions in each country you have worked in. Having said this, if you have done so, the chances are you will benefit from minimum pensions from each country, which will produce a higher figure than otherwise. But this system means it may well not be necessary to continue to make voluntary contributions as your combined contribution history is more than sufficient.
How is healthcare affected? Any other advantages?
The good news is that receiving your pension locally will mean that your access to the local healthcare system comes with it – no need for a form S1. So, any attempts by the UK to remove themselves from the S1 scheme will not affect you.
Receiving your total State Pension entitlement in Euros has to be a distinct advantage, as it removes exchange rate risk from your retirement income. So, although a pension from a former UK employer will have to be paid in Sterling (but see below), and is therefore at risk from a weakening Pound, at least your State Pension will be paid in the currency you spend.
Other financial planning tips?
Despite the UK government’s attempts to water down the ability to ‘export’ your UK private pensions using the QROPS arrangements, this is still
possible – but perhaps won’t be for much longer. So, obtain advice about whether such a move would be beneficial, as soon as possible.
Any savings or capital you have should be invested tax-efficiently and with the aim of protecting it against both inflation and exchange rate fluctuations. Stock Markets can fluctuate too, sometimes dramatically as we have seen, so be careful you understand the amount of risk your investments are exposed to, and seek help from a suitably qualified professional who will be able to help you over the long term.
The Spectrum IFA Group specialises in financial and retirement planning for English speaking expatriates in France, Spain and across Europe. Please feel free to contact me with any questions or comments.
How much do I need for a comfortable retirement?
How much money will I need in retirement?
This is one of the most common questions I hear as a Financial Adviser in Madrid, Spain.
The answer to that question differs from person to person and the numbers I discuss with my clients vary massively. To some, having a quiet retirement with little requirements is the goal; others will want to continue playing golf and attend social events weekly. There is a huge difference in what you will need in your pocket with these different scenarios.
So, what do the experts think?
Researchers have calculated how much money a person needs per year in order to enjoy a comfortable retirement. The numbers were calculated by Loughborough’s Centre for Research in Social Policy (CRSP), The Pensions & Lifetime Savings Association (PLSA) and Retirement Living Standards (RLS). A report from Loughborough University and the Pensions and Lifetime Savings Association aims to help people understand how much they will need for a minimum, moderate or comfortable quality of life once they retire.
In the UK a full state pension comes in at just over £8,500, but it’s the other savings you accrue over your working life that will make the difference in people’s post-work years.
Experts found that a single person will need about £10,200 a year to achieve the minimum living standard, £20,200 a year for moderate living standards and £33,000 a year for comfortable living standards. For couples, the minimum standard came in at £15,700, moderate was £29,100 and comfortable worked out as £47,500. The results are based on consultations with members of the public and consider what is needed in retirement for home DIY and maintenance, household and personal goods, holidays, food, transport, clothing and social engagements.
The new Retirement Living Standards describe three different standards of living with associated costs for each – all established by what the public considers realistic and relevant expectations. Associated costs are made up of household bills, food and drink, transport, holidays and leisure, clothing and personal and helping others. The standards cover a range of goods and services that are relevant to most people. These and other costs, such as tax on pension income, may need to be added depending on individual circumstances.
A series of profiles and infographics have been created on the PLSA website to help people calculate their own finances. The research for the Retirement Living Standards was adapted from the approach used to produce the Minimum Income Standard – a calculation of what the public thinks is an acceptable minimum standard of living. The data was gathered through 26 group discussions with around 250 members of the public already retired or approaching retirement, from a wide range of backgrounds. Expert views were taken into account for some areas, such as transport, energy usage and food costs.
The discussions set the parameters for how higher living standards should be described and defined. Through these discussions, three retirement living standards were agreed: minimum, moderate and comfortable.
At a cost of £10,200 per year for a single person and £15,700 for a couple, the minimum lifestyle covers all your needs plus enough for some fun – including social participation and social occasions.
The moderate lifestyle (£20,200 a year for singles and £29,100 for couples) provides, in addition to the minimum lifestyle, more financial security and more flexibility.
At the comfortable level (£33,000 a year for singles and £47,500 for couples), retirees could enjoy some luxuries like regular beauty treatments, theatre trips and three weeks in Europe a year.
Breaking down the RLS:
House: Household utility bills, decorating and maintenance, furniture, cleaning supplies, lightbulbs, cooking utensils, appliances (e.g. fridge, washing machine), garden supplies, towels, bedding, gardener/cleaner/window cleaner & funeral plan.
Food and Drink: Household food shopping, eating out, beer & wine.
Transport: Car running costs, railcard/train travel & taxis.
Holidays and Leisure: TV, DVD player, laptop, printer, speakers, CDs, stationery supplies, TV license and subscriptions, internet, activities & holidays.
Clothing and Personal: Clothing, footwear, cosmetics, toothbrush, toothpaste, shaving supplies, hair styling, beauty treatments, dentist, opticians, podiatry & minor first aid supplies.
Helping Others: Gifts, helping others (if applicable) & charitable donations
Planning early is key to getting your retirement plans in order. You can look up another of my articles here on this subject titled “It Is Never Too Early”
Don’t delay your financial plans. For planning, yesterday is better than today, which is better than tomorrow. Contact me, Chris webb on 639 118 185 or email@example.com if you want to discuss your own circumstances.
Loughborough’s Centre for Research in Social Policy (CRSP).
Pensions and Lifetime Savings Association (PLSA)
Retirement Living Standards (RLS)
Being prepared for BREXIT in France
On 31st January 2020, the UK left the EU. However, the real effects of Brexit, for those of us living in France, will not properly be felt until after the 31st December 2020 (what an interesting New Year’s Eve that will be!) and thereafter. Hopefully, by that time we will have a clearer idea of what our rights and responsibilities are. Until then there will still be much speculation and media noise, which may be just as confusing as it has been over the past four years.
One thing Brexit has established, from the very beginning, is that British citizens living in France, or planning to settle in France, need to get their affairs in order and decide where they would like to live for the foreseeable future. As British citizens we can always return to the UK if we so choose, but if we want to continue to live in France we must show that we have lived here continuously for the last five years or that we intend to continue living here in future.
The next few months are going to be very interesting and it is more than ever important for British citizens to consider some important financial changes.
Pensions after Brexit
In 2006, the UK introduced a law making it possible for UK private pension benefits to be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS), provided that the overseas scheme meets certain qualifying conditions.
For those pensions that can be transferred there are many benefits including:
- No obligation to purchase an insurance company annuity, at any time
- The potential to pass on the member’s remaining pension assets to nominated beneficiaries on death with minimal or no death duty payable. By comparison, currently a tax charge at the beneficiary’s marginal rate can be applied in the UK, where the member is over age 75 at death
- A wider choice of acceptable investments offered, compared to UK pension plans
- The underlying investments and income payments can be denominated in a choice of currencies, which can potentially reduce exchange rate risk
- Potential to receive a larger amount of Pension Commencement Lump Sum compared to UK schemes
- Depending upon the jurisdiction where the QROPS is set up, income payments may be made without the deduction of local taxes, meaning that income will only be taxed in accordance with the law of the jurisdiction where the member is resident
In 2017 the UK government announced its intention to introduce a new 25% Overseas Transfer Charge (OTC) on QROPS transfers taking place on or after 9th March 2017. This charge does not, however, apply where the QROPS is in the European Union (EU) or EEA and the member is also resident in an EU or EEA country (not necessarily the same EU or EEA country) and remains EU or EEA resident for the next five full UK tax years.
Many of those who work in the industry believe that after the transition period, it may no longer be possible for British citizens to transfer their pensions into an EU QROPS without incurring the 25% charge.
QROPS may not be suitable for everyone and much will depend upon the nature of the UK pension benefits being considered for transfer, as well as the person’s attitude to investment risk. Transferring a pension to a QROPS is not a decision that should be taken lightly nor in haste and proper financial advice with an experienced adviser is essential. Even when the decision has been made to transfer the pension it may take a good few months to complete, which is why, if you are even considering this possibility, it is important to contact a local adviser to explore what your options are.
Taxes after Brexit
As tax between the UK and France is determined by the Double Tax Treaty, this will not be affected by the fact that the UK has left the EU. However, whilst not directly taxed, a lot of UK income, such as UK rental income, is added to the taxable base and increases the tax margin of the French taxpayer. If you intend to live in France, you may want to consider whether it is really in your interest to hold onto UK assets.
It is possible to protect your capital investments in France and ensure that they can grow in a tax efficient environment by way of an Assurance Vie policy. French Assurance Vies or French approved foreign Assurance Vies offer valuable benefits when it comes to income tax, inheritance tax and estate planning. Foreign portfolios and bonds are not treated as Assurance Vies and any gain is subject to tax and social charges irrespective of whether this income is taken or whether it is brought into France. If you are French tax resident, you are taxable on your worldwide income in France. Proving that you are French tax resident will be an important factor for establishing the Right to Remain in France.
Being resident in France does not necessarily mean that all your assets have to be in France or have to be in euros. There are many opportunities for holding sterling based diversified portfolios in a tax efficient manner.
For anyone intending to live in France for the foreseeable future, be aware that today’s valuable financial planning opportunities are unlikely to remain beyond the short term (31st December 2020 could be an important date in this respect). Contact me, Katriona Murray, and I will be happy to arrange a meeting.
Living in Spain after BREXIT
After the results from the UK’s General Election, it seems we are closer to Brexit than ever before, so are you prepared for it living in Spain?
Documentation to remain in Spain
There are many rumours among non-Spanish people of what you need to do to stay in Spain should Brexit happen. The response from the Council recently has been, should you hold a NIE and an Empadronamiento, you are proving you are resident in Spain, so for now these should suffice. However, if Brexit does go ahead, Spain could draw a ‘Stay in Spain’ line in the sand which would then need adhering to. In the worst case scenario, a renewable 90-day tourist visa would give you time to adhere to whatever the new rules are. Spain has said publicly it will reciprocate what the UK does, and the UK knows there are far more British people living in Spain than the other way around in the UK.
UK Private and Corporate Pensions
The current HMRC rules state that if you take advantage of moving your UK pension abroad it must be to either where you are resident OR in the EU (due to the UK being in the EU). If this is not the case, you would have to pay 25% tax on the pension amount. Therefore, it is very likely that as the UK would be leaving the EU, these rules would not be met and the 25% tax charge would start to apply to pension movements outside of the UK. This could be the last chance to evaluate whether it’s better for you to move your pension or not and take advantage of the potential benefits, including being outside of UK law and taxes.
National Insurance Contributions
If you were to start receiving your State pension now, you would approach the Spanish authorities and they would contact the UK for their part of the contribution, taking both into account. Before the UK joined the EU, you would contact each country individually and receive what they were due to pay you. If this becomes the case again, for many British people the UK part of their State pension would potentially be more important, as it is likely to be the bulk of what you receive. We don’t know how Spain will act with regard to state pension benefits to foreigners; therefore it would make sense to manage the UK element well if this is your largest subscription.
I recommend two things here; firstly check what you have in the UK so you know where you are. You can do that here:
You can contact the HMRC about contributing overseas voluntary contributions at a greatly discounted rate, from £11 a month: you can even buy ‘years’ to catch up:
I have mentioned this in Newsletters before, but it really is a great thing to do, both mathematically and for peace of mind. Many people I meet living away from the UK have ‘broken’ years of contributions which is leaving themselves open to problems in retirement.
TIP: If you have an NI number, you do not necessarily have to be British to do this.
Time apportionment relief
Statistically, in 75% of British expat couples living abroad, at least one of them will return to live in the UK. It remains to be seen whether this changes if the UK leaves the EU, however, you can easily save yourself some serious tax if you have this in your plan of eventualities.
You can, in effect, give yourself 5% tax relief for every year you spend outside the UK by positioning your investments/savings correctly. Then, upon your return, you can take this tax relief when you are ready, such as in the following example:
Mr and Mrs Brown invested £200,000 ten years ago when they were living in Spain.
After this time, it is now worth £300,000
They returned to the UK and have been resident there for the last year (365 days)
They decide, after being back in the UK for 1 year (365 days) to cash in the investment, taking advantage of ‘Time Apportionment Relief’ which will be calculated the following way:
£100,000 (total gain)
multiplied by the number of days in the UK (365)
divided by total number of days the investments have been running i.e. 10 years (3650 days)
Resulting in a £10,000 chargeable gain (that is what you declare, not the tax you pay).
There are other potential tax savings as well, but they depend on other circumstances. If you have your savings/investments set up the right way you can take advantage of this.
If you have any questions or would like to book a financial review, don’t hesitate to get in touch.
Brexit – What now?
Some of you, like me, might have woken up on Friday and after hearing the election result felt utterly depressed. Irrespective of how the vote could or should have gone, or who you may have voted or wanted to vote for, this result will seriously affect the Brits living in Europe. Brexit is now more likely than ever, so what does this mean for us? Well luckily, there is someone who is somewhat of an expert on the matter, Professor Sébastien Platon, Professor in European Law at the University of Bordeaux and incidentally my husband! Over breakfast I asked him a few questions.
So, what now?
The British parliament must first pass the EU (Withdrawal Agreement) Bill, and then they have to agree on the Withdrawal Agreement itself. Given that the Conservatives now have a majority it is likely to be passed. Either later or at the same time, the European Parliament also has to agree on the withdrawal agreement. If all of this gets done by the 31st January, Brexit will happen as planned. If not, the UK will have to request ANOTHER extension which would have to be agreed by the other 27 member states.
During the transition period are all European rights maintained?
Apart from the right to vote and run as a candidate in EU elections and municipal elections, the right to participate in European citizens’ initiatives and the UK’s right to vote on EU laws, all rights, including the right to free movement, are maintained during the transition period.
Does a British citizen who has not yet settled in France still have the right to do so after 31st January?
Yes. Up until 31st December 2020 all British citizens can come and settle in the EU. After the transition period, those who have established residency in the EU and wish to bring their family members (spouses, partners, direct descendants under 21 or dependent, direct relatives in the ascending line) to live with them can still do so.
Can the transition period be extended?
Yes, if the UK and EU agree to extend the transition period. But, unlike the Brexit extensions, they cannot ask for an extension the night before the 31st December 2020. A decision has to be made before 1st July 2020 extending the transition period for up to 1 OR 2 years. British citizens would therefore have until the end of the transition period (or extended period) to settle in the EU.
What about healthcare?
During the transition period, the EU social security coordination rules will continue to apply. The British who reside in France (or any other member state) and are in the UK health system but not the French health system can continue to benefit from this health cover as normal. After the end of the transition period, these rules will continue to apply to:
• UK nationals subject to the legislation of a Member State at the end of the transition period,
• UK nationals who reside in a Member State while being subject to the legislation of the UK at the end of the transition period,
• UK nationals who pursue an activity as an employed or self-employed person in one or more Member States at the end of the transition period and who are subject to the legislation of the UK,
• Their family members and survivors
These persons will be covered as long as they continue, without interruption, to be in one of these situations involving both a Member State and the UK at the same time.
What about pensions?
For the persons I’ve just mentioned, the time worked in the UK will count towards an EU pension and inversely any time spent working in France would contribute towards entitlement for a UK pension should they wish to return to the UK when they retire.
Do we need to apply for cartes de séjour?
During the transition period you do not need them. After the transition period each member state has the right to require UK citizens to apply for a new residence status, the sole purpose of which is to verify whether the applicants meet the conditions set in the withdrawal agreement. If they do, they have a right to be granted the residence status and the document evidencing that status (which will NOT be a “carte de séjour”). The French administration cannot refuse this status if you meet the conditions. The deadline for submitting the application shall not be less than 6 months from the end of the transition period. The host State has to ensure that any administrative procedures for applications are “smooth, transparent and simple, and that any unnecessary burden are avoided” with applications being “short, simple, user friendly and adapted to the context of” the agreement. Only once the agreement has been ratified will we know if and how the French Government wants to proceed on the matter.
Whilst I do not agree with Brexit and wish things had happened differently, at least after four years of uncertainty there may now be some progress. The pound bounced back up on Friday and this election result is likely to have a positive impact on the markets and portfolios.
UK Pension transfer – most common questions asked
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
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.
Taking a Lump Sum from your Pension when Resident in Spain
*UPDATED 1st January 2020
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)|
|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,
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
Does Qrops or transferring your UK Pension overseas work?
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.”