Britons today can still benefit from tax-free QROPS transfers and high final salary pension transfer values – but Brexit could change the rules.
British expatriates today can benefit from tax-free QROPS transfers and high final salary pension transfer values – but Brexit could change the rules.
Pensions are often the key to a comfortable retirement. But with more pension options than ever and the Brexit clock ticking, with no certainty beyond 2020, it can be difficult to establish the best approach. Make sure you are aware of the current pension issues that could affect you and the available opportunities, before they potentially disappear.
1. Expatriates can access tax-efficient opportunities
Many expatriates benefit from transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvesting funds into more tax-efficient arrangements for their country of residence. Doing this can also offer estate planning benefits and multi-currency flexibility to invest and withdraw funds in euros or sterling. Once in a QROPS or locally-compliant structure, funds are usually sheltered from UK taxation.
QROPS transfers are currently tax-free if both you and the QROPS are based in the EU/EEA (European Economic Area). Otherwise, the UK government charges a 25% ‘overseas transfer charge’.
If the UK extends this charge to the EU/EEA region post-Brexit, as many are speculating, there could be a limited time to transfer without tax penalties.
See more about the pros and cons of transferring to a QROPS
2. Many pension providers are vulnerable
Millions of Britons have ‘final salary’ (or ‘defined benefit’) company pensions, where an employer pays a fixed percentage of salary throughout retirement. Widely considered ‘golden’ pensions, the income provided is usually generous and lasts your lifetime.
However, with prolonged ultra-low interest rates and increased life expectancy, the cost of funding these benefits has soared, making it harder for many companies to afford promised payments. Like BHS, companies with significant shortfalls can fail along with their pension schemes.
Although members of failed final salary pensions have a safety net with the UK government’s Pension Protection Fund (PPF), compensation is capped and limited to 90% of members’ benefits (maximum of £36,018 a year at age 65) so will not fully protect everyone.
3. Transfer values are unusually high
To reduce pension liabilities, many companies are offering final salary pension members unusually large sums (‘transfer values’) to leave. Calculated as a multiple of the future pension payment, some pay-outs have increased from 20x three years ago to up to 40x today – often hundreds of thousands of pounds. Carefully reinvested, such high pay-outs could provide a retirement income that exceeds the original annual payment.
Although transferring could potentially prove more beneficial than drawing a guaranteed pension for life, the reverse is more likely, so it is crucial to fully understand the risks and implications before taking any action.
See six questions to consider before transferring a final salary pension
4. The lifetime pension allowance could catch you out
Once combined UK pension benefits (excluding the State Pension) are valued over £1.055 million (£1,073,100 from April 2020), they breach the government’s lifetime pension allowance. Anything over this triggers UK taxation of 55% when taken as cash or 25% as income or transferred to a QROPS, regardless of residence. In 2017-18, 4,550 people were caught out, paying £185 million in penalties.
Calculating your lifetime allowance is complex. While the threshold sounds high, after decades of pension saving, employer contributions and investment growth, you could go over without realising it. Taking advantage of today’s high final salary transfer values can also risk tipping you over the threshold. Those close to the limit should explore HMRC ‘protection’ options or transferring to a QROPS to avoid or reduce tax penalties.
See more about the lifetime allowance for UK pensions
5. The window of opportunity may be closing
Pensions rules can change at any time, but with Brexit reform is much more likely, as the UK government gains more freedom to tax UK nationals in the EU. Once the transition period ends on 31 December, they could potentially penalise withdrawals for non-UK residents, and have the means to extend the 25% overseas transfer charge to target QROPS within the EU. In any case, such high transfer values for final salary pensions may not be available for long. So if you decide transferring is right for you, take action as soon as possible – bearing in mind that transfers can take months to complete – to lock in today’s benefits and avoid unnecessary taxation.
Read ‘Is time running out for tax-free pension transfers?’
6. Quality professional advice is essential
Transferring pensions – whether from a final salary scheme or transferring overseas – is not a one-size-fits-all solution. It is critical to take personalised, professional advice to establish if transferring is suitable for you and navigate the complex options ahead.
Transfers are also a key target for pension scams, so take extreme care and only use a UK-regulated provider. For final salary benefits worth over £30,000 a year, the Financial Conduct Authority makes this compulsory, but it is advisable for anyone considering their pension options.
Your adviser should take into account your particular situation, needs and goals, as well as the cross-border tax implications, to tailor a suitable strategy for you.
See six tips for getting your pensions strategy right, first time
With the Brexit countdown underway and still so much uncertainty ahead, it is sensible to review your pension arrangements and consider what could work for you now, under current rules.
Contact us for personalised, specialist advice to help ensure you can look forward to a financially secure retirement, wherever that may be.
Download our free guide to UK pensions in Europe
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.