What can expatriates do with UK pensions and how will they be taxed abroad? Explore current options before Brexit changes the rules.
What can expatriates do with UK pensions? How will they be taxed in Spain, Portugal or France? Explore current options, such as transferring to a QROPS, before Brexit potentially changes the rules.
After four years of uncertainty, we can now expect Brexit to start taking effect after the transition period ends on 31 December 2020. While Brexit changes little for UK nationals living in the EU until then, the countdown is on to prepare.
Once the UK sheds its EU obligations – including freedom of movement for capital – the government gains more scope to tax UK nationals abroad. Pensions are a particularly likely target. With only months to go until the rules potentially change, there is increasing urgency to review your pension options and take advantage of current opportunities.
Although the clock is ticking, take care to consider what would work for your circumstances, plans and retirement goals, as well as the tax implications in both countries.
Transferring UK pensions abroad
EU residents can currently move UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) free of any personal tax.
Doing this can unlock several advantages, such as consolidating several pensions under one roof, gaining flexibility to take your pension in the currency you need, and freedom to pass benefits to heirs other than your spouse. Once transferred, funds would also be protected from UK lifetime allowance charges, as well as future changes to UK pension rules that may adversely affect you – an increasing possibility after Brexit.
However, the UK imposes tax penalties of 25% on transfers to a QROPS outside the EU/European Economic Area (EEA). There are expectations that the UK may widen this taxation net to include EU/EEA-based QROPS once the transition period ends in December. This could be easily done since the UK legislation is already drafted to catch all pension transfers; the government would just need to remove the EU/EEA exclusion to make this happen. As such, time may be limited to transfer without tax penalties.
Read ‘Is time running out for tax-free pension transfers?’
Pension transfers can take several months to process, so if you decide that transferring is right for you, act soon – well before the December deadline – to lock in current benefits and avoid unnecessary taxation. The benefits of a QROPS can vary greatly between providers and jurisdictions, however, so take specialist advice to navigate the complex options and determine the most suitable solution for you.
Leaving your pensions in the UK
Of course, you could do nothing and access your UK pension from your country of residence.
If you have a ‘defined contribution’ (‘money purchase’) pension, current options include taking cash, receiving a regular income (drawdown) or purchasing a lifetime income (annuity).
You cannot usually take ‘defined benefit’ (‘final salary’) pensions as cash; instead you receive a regular income throughout retirement. While you could transfer to a defined contribution scheme for more flexible access, this is likely to be less beneficial than receiving a guaranteed income for life.
Note that UK pension payments are usually only paid in Sterling. If you are living in Europe and your spending is in Euros, you could find that conversion fees and the variable exchange rate reduces the value of your pension income.
Remember also that UK pensions remain subject to UK rules, which can change at any time. UK funds are also vulnerable to lifetime allowance penalties of 25% or 55% when combined pension benefits exceed £1.055 million (£1,073,100 from April 2020).
How will UK pensions and QROPS be taxed in Spain?
If you are living in Spain as a Spanish resident, UK pensions (excluding UK government service pensions) are generally only taxable in Spain, not the UK. So, while 25% of cash withdrawals can be taken tax-free in the UK, they are taxable here for residents.
When taking lump sums, cash or income from either a UK pension or a QROPS, the general Spanish income tax rates apply, which vary by region, for example:
- up to 48% in Andalucía, Comunidad Valenciana or Cataluña
- up to 47.5% in Islas Baleares
- 46.5% in Islas Canarias
- up to 46% in Murcia.
How will UK pensions and QROPS be taxed in Portugal?
If you are living in Portugal as a Portuguese resident, UK pensions (excluding UK government service pensions) are generally only taxable in Portugal, not the UK. When taking lump sums, cash or income from a UK pension or QROPS, the Portuguese scale income tax rates apply, ranging from 14.5% to 48%.
If you already have non-habitual resident (NHR) status or applied for Portuguese residence before 1 April 2020, you can potentially receive UK pension income tax-free for your first decade in the country – so long as it can be proven to be an income (i.e. taken over a period of at least ten years). Otherwise, non-habitual residents are subject to a flat 10% tax on foreign pension income.
How will UK pensions and QROPS be taxed in France?
If you are living in France as a French resident, UK pensions (excluding UK government service pensions) are generally only taxable there, not the UK. So, while 25% of cash withdrawals can be taken tax-free in the UK, they are taxable in France.
When taking lump sums, cash or income from a UK pension or QROPS, the general French income tax rates apply. For income earned in 2019, this ranges from 14% (over €10,064) to 45% (over €157,806). The starting rate for 2020 income is lower at 11% (over €9,964), with the highest rate remaining at 45% (over €156,244). There is a capped 10% allowance on gross pension income.
If you meet certain conditions, however, it is currently possible to take your entire UK pension as a lump sum and pay just 7.5% French income tax.
Pension income and lump sums are also subject to annual French social charges of 9.1%, unless you hold Form S1 (available at UK State Pension age) or are not registered for French healthcare.
More on what you can and can’t do with pensions in France
Establishing the best pension strategy for you
Depending on your situation, it may be more beneficial to reinvest your UK pension funds into an alternative tax-efficient structure that is compliant in your country of residence, so make sure you explore your options.
Your pension is likely to be central to your long-term financial security, so it is crucial to proceed with care and take regulated advice to protect against pension scams. An adviser with cross-border expertise is best placed to help you establish the best approach for you and your family’s particular situation in your country of residence.
While there is no one-size-fits all answer for what to do with your pension, everyone can benefit from reviewing their arrangements as early as possible in 2020, before Brexit reshapes the landscape.
Contact us to discuss your pension options
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.