One area of concern for British expatriates is how the UK’s decision to leave the EU will affect their pensions. How could Brexit affect your state pension? And what about registered pension schemes and QROPS?
One area of concern for British expatriates is how the UK’s decision to leave the EU will affect their pensions. How could Brexit affect your state pension? And what about registered pension schemes and QROPS?
As with issues like residency and healthcare, the rights you have now should remain in place until the UK is officially no longer an EU member state, a process that may take two years or more. This gives you plenty of time for to consider your options. We may find that nothing materially changes after that in how we draw and receive UK pensions in countries like Spain, France, Portugal, Cyprus and Malta, though income may be affected by exchange rate movements.
How could Brexit affect your state pension?
UK residents receive annual inflationary increases to their state pension benefits. Expatriates living in the EU are protected by EU law and continue to receive these increases, but those resident in countries like Australia, New Zealand and Canada do not.
To be entitled to the annual increase you need to be resident in an EU or EEA country, Switzerland, or a country with which the UK has a social security agreement which includes a clause entitling recipients to an annual increase. Only two of the UK’s 18 social security agreements do not contain this clause.
The UK does not currently have any bilateral agreements in place with EU countries, other than at a general EU level, so what will happen after Brexit? If we look to the past as guide to the future there is some good news.
The legal framework and administrative processes are already in place to give the state pension annual increase to retirees living in an EU country. The UK has also proved willing to adopt a positive approach to the entitlement of increases in times of change (the breaking up of Yugoslavia into Bosnia-Herzegovina, Kosovo etc.)
If however the government was under pressure to raise money following Brexit, it could potentially take steps to prevent those not contributing to the UK economy from receiving benefits like the annual rise in the state pension. Only time will tell, but comfort can be taken by the fact that recent history, coupled with the framework already being in place, suggests that the annual increase may well continue for those living in EU countries.
How could Brexit affect your registered pension scheme?
Based on current law and practice, Brexit will have no impact on your pension schemes.
The UK pension freedom is solely a matter of UK law and so whether the UK is an EU member state or not is irrelevant.
Overseas pensions, as a generic subject area, are not discriminated against under the general law of Cyprus, France, Malta, Portugal or Spain. This will not change with Brexit. The taxation of benefits should not be affected either. It is the double tax treaty between two countries that determines taxation where the benefit arises in one country and the recipient is tax resident in another. These are individual agreements between the UK and each country and are not impacted by whether the UK is a member of the EU.
What about the ability to transfer to Qualifying Recognised Overseas Pensions Schemes (QROPS)? Although the core of the legislation can be traced back to an EU directive, the UK has a long history of permitting transfers to bona fide overseas pension schemes. QROPS are a function of UK law and can be based in both EU and non-EU countries.
There is some speculation, however, that the UK could introduce a new ‘exit tax’ for pension transfers. This is not substantiated, but there is quite a bit talk about it. With all the various changes and increased complexity to UK pensions over the years, further changes would not be a surprise.
If you have a defined contribution (money purchase) scheme and are concerned about the potential of an exit tax or the uncertainty of future UK pension reforms, you could consider transferring your funds out of the UK into a QROPS. UK SIPPs and QROPS have basically the same structure; you can continue with your current benefits, but in a potentially future-proof QROPS.
Another significant benefit of QROPS is that you are able to choose the currency. Brexit negotiations could result in a weaker Sterling and QROPS could be a way to protect your pension income.
This is also a good time to review the underlying investments. Many UK pensions funds are predominately exposed to UK investment assets, and with the period of uncertainty ahead for the UK you should look to have wider diversification in your funds, with an investment strategy based on your risk profile.
As always, the best approach for your pension funds depends on your circumstances and objectives. It is important to take personalised and regulated advice, ideally from a locally based firm which specialises in advising expatriates, to explore all your options and determine the most suitable solution for you.
Any questions? Ask our financial advisers for help.
