Asking key questions about retirement planning and understanding your pension options can help get you on track for your dream retirement, whatever stage of life you’re in.
Whether you are nearing retirement or it is several years away, it is never too early to start thinking about how you will finance your golden years. Even if you are already retired, you should regularly review your arrangements to ensure you continue meeting your retirement goals.
It might be that you enjoy spending time abroad and would like to retire in the sun, now or a few years down the line. Or maybe you are already living overseas and are unsure what your options are.
Whatever your situation, what do you need to think about to secure your dream lifestyle in retirement?
Retirement planning: approaching retirement
Even if retirement is a way off, there are certain things you need to consider – the earlier the better – to make sure you are on the right track financially. There may be steps you can take today to help make your retirement goal a reality.
Questions you should ask include:
- Will I be able to afford to retire when I want to?
- What is the best strategy for withdrawing from my business or employment?
- What options do I have for my pensions? Are they likely to change?
- Will I be able to retain my existing wealth and assets?
- Do I want to spend some or all of my retirement abroad?
Let’s say that you plan to retire within the next few years and move permanently abroad. You may have concerns about whether you can afford your preferred lifestyle without having to sell existing assets. You may not want to have to downsize your home, for instance, as you would like this to eventually pass on to your family. Perhaps you have a business to sell and are unsure how best to convert your years of hard work into a retirement nest egg. Then there are the complex residence and tax implications of living in a different country.
Here, professional financial advice can prove invaluable, especially with an adviser who understands the country you’re hoping to move to. They can take a holistic view of what you have – your savings, investments, assets, pensions – together with what you want – your timeline, income requirements, legacy wishes – and an objective assessment of who you are – your circumstances, goals, risk appetite – to design a personalised retirement plan for you.
Retirement planning: already retired
If you have already reached retirement age or stopped working, that doesn’t mean you should forget about retirement planning. After all, you could be retired for thirty years or more!
Regular reviews allow you to adapt your strategy to suit your changing circumstances and goals, such as incorporating new family members, addressing health issues or relocating. It enables you to keep up with the ever-changing tax and pensions landscape, including new opportunities that could work in your favour.
Your pension options
Pensions are usually the foundations of retirement, so deciding what to do here may be one of life’s most important financial decisions. Pensions are complex anyway, but with greater freedom and choice than ever, not to mention an increase in sophisticated pension scams, you must take great care.
You might benefit from consolidating several UK pensions into one to provide a coherent, more cost-effective investment platform for your retirement income. However, this may not be the most tax-efficient approach for your new country of residence. By receiving pension income in sterling, you would also be exposed to conversion costs and exchange rate risk.
Britons resident abroad have the option of transferring UK pensions to a Qualifying Overseas Pension Scheme (QROPS). Doing so can unlock advantages you do not always get with UK pensions, such as flexibility to take income in euros and more freedom to pass benefits to chosen heirs. Transferred funds would also be protected from UK lifetime allowance charges and future UK pension rules that may adversely affect you – an increasing possibility after Brexit.
If you transfer UK pensions to an EU-based QROPS as an EU resident, you can currently do so tax-free, but transfers outside the EU/EEA invite a 25% UK tax penalty. There were concerns that this may be extended to capture EU-based QROPS after Brexit. There is no sign of that so far, but that doesn’t mean it might not happen in the future.
Expatriates in Spain should be aware that, following Brexit, their UK pension plans could now be liable to Spanish wealth tax. This is because of a 2019 tax ruling which concluded that non-EU pension plans do not qualify for the wealth tax exemption. So transferring your pension plans into an EU pension plan, such as a recognised EU QROPS, should help avoid this complication.
Transferring is by no means a one-size-fits-all solution and the benefits of a QROPS can vary greatly between providers and jurisdictions. So take regulated, specialist advice before making any significant pension decision to protect your benefits and establish the most suitable option for you.
See the pros and cons of QROPS
If you’ve worked hard to build up your pension savings, keep an eye on the UK’s lifetime allowance (LTA). The UK caps how much you can hold in combined pension benefits (excluding State Pension) without paying extra tax. Once your pension funds exceed the limit, you pay a tax charge whenever you access your money – either 55% for lump sums or 25% for income or transfers to an overseas pension. This continues to apply to expatriates, even though you are not tax resident in the UK.
Although your pension will be assessed for the LTA when you transfer into a QROPS, after that your funds would be protected from these charges. If you are not yet on the limit but investment growth is likely to take you above, transferring sooner rather than later could save you tax.
Launched at £1.5 million in 2006, the LTA peaked in 2011 at £1.8 million before dropping to £1 million by 2016. Tracking inflation since then, the March 2021 Budget cancelled this year’s scheduled increase, freezing the limit at £1,073,100 until 2026. And recent press speculation suggests that the UK Chancellor is considering cutting it to £800,000 or £900,000.
If a long-term move is on the cards, it is especially important to review your retirement strategy early. Not only will you need to consider your residence status and cross-border tax implications in a post-Brexit world, you’ll need to adapt your estate planning to suit the very different succession rules in the country you are moving to.
In any case, careful planning is the key to minimising taxation and maximising the available opportunities so that you can enjoy the retirement you want for as long as you need. For the best results, contact Blevins Franks specialist, cross-border advice.
Contact us to discuss your retirement plans