If you are already living in Europe or are planning to move to Europe ahead of the Brexit deadline, make sure you are fully aware of how it may impact pension transfers.
The Brexit transition period is due to end on 31 December. However, with no certainty about whether the UK will leave the EU with a deal, there are unknowns surrounding UK pension rules for expats. Therefore, now is the best time to review your pensions, before the rules potentially change.
What are the pension rules for UK expats?
Prior to Brexit, the UK and EU operated under a shared set of rules for how pension transfers should be managed in regard to tax and other relevant issues. However, given the UK will be leaving the EU, the rules are likely to change especially in regard to tax implications.
Most expatriates in the EU currently transfer their pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) completely tax-free. There are just two main situations in which expats must pay tax:
- If your UK pension benefits exceed the UK’s lifetime allowance (currently £1,073,100). In this case, you would face a 25% tax penalty on any amount transferred over that limit (even if you are a non-UK resident).
- If you transfer to a QROPS based outside of the EU/European Economic Area (EEA). In this case, the UK would apply a 25% overseas transfer charge on the whole amount to be transferred (unless you live in the same jurisdiction as the QROPS).
However, while these are the current rules for international pension transfers, things may change post-Brexit. This is especially true given HMRC and the UK Government will be keen for UK pension funds to remain in the UK.
What to consider if you are planning on transferring your pension
Without any certainty that tax-free transfers will continue after the UK leaves Europe, it is wise to act now if you are considering transferring your pension into an international scheme.
Keep in mind, however, that transferring a personal pension is not right for everyone nor for every pension scheme. For example, there are a number of pensions that cannot be transferred from the UK to an international scheme, including:
- State Pensions
- certain former employer schemes already in drawdown
- Civil Service and Armed Forces pensions (e.g. NHS, Police, Teachers, Fire Services)
- Council schemes
- an employer scheme you still pay into
- any annuities already purchased
- any pension held within the Pension Protection Fund.
Note: it is not advisable to transfer schemes that offer high Guaranteed Annuity Rates.
No two international pension schemes are the same
If your pensions qualify for transfer and you are considering moving to a QROPS, know that there are different providers and different jurisdictions can affect the benefits you receive.
Also be aware there are alternative options should you not qualify nor wish to transfer your personal pension to an international scheme. These options depend on your tax residency, but three of the more popular include:
Self-Invested Personal Pension (SIPP)
A SIPP is essentially a ‘pension wrapper’ that remains under UK legislation and holds all your investments until retirement when you start to draw income from your pension. They offer a great deal of choice when deciding which underlying investments you want to hold within your ‘wrapper’. They also allow you to invest in and switch between a range of assets including shares and commercial property.
An international SIPP can also be used to add named beneficiaries to the pension value. SIPPs are typically cheaper and can be used by non-EU residents who don’t need to pay the 25% fee because their money never leaves the UK.
A key difference between a SIPP and QROPS is that the SIPP remains in the UK and is linked to GBP (although it is still possible to invest and hold multiple currencies). A QROPS is held outside of the UK and it is possible to change the currency to a completely euro-based plan.
It is possible to manage a SIPP yourself; however, we always recommend seeking advice and work with many expats to transfer their pensions to SIPPs on their behalf.
Qualifying Non-UK Pension Scheme
While a SIPP is popular with UK residents, the Qualifying Non-UK Pension Scheme (QNUPS) is an attractive alternative because, depending on personal circumstances, it can offer substantial advantages to people living overseas.
International banking and offshore bank accounts boast legitimate financial advantages for expats over domestic banking arrangements, one of which is access to investment opportunities to help boost your pension savings. The biggest advantage of saving or investing outside of a pension is that you will be able to access your money earlier than retirement age if needed.
Seek advice before making a decision about transferring your pensions
The decision about whether to transfer a personal pension depends on your individual circumstances. And if there is no clear advantage to transferring your pension, it’s strongly advisable to leave it where it is.
The best thing to do is seek professional advice. That way, you can be absolutely clear about everything involved. In a recent post, we recommended a number of questions to ask your financial adviser before making a decision about transferring your UK pensions.
Arrange a pension audit
Even if transferring your pension is not the best option, and regardless of what happens post-Brexit, it is always sensible to review your pensions.
We work with many expats, some of whom have complex pension arrangements, so are well-placed to review your pensions and offer expert advice.