For those who have chosen to retire in continental Europe, now is the right time to speak with an adviser and review options before Brexit is possibly enforced later this year, writes Strabens Hall senior client director Joanne Leach.
Although it’s likely that those who are lawfully settled in the EU before then will have uninterrupted rights, there are still many uncertainties, particularly around what will happen to UK pension rules for expats.
One of the main UK pension options for British expatriates is transferring to a Qualifying Recognised Overseas Pension Scheme (Qrops).
Not seeking advice could prove to be a very expensive mistake, in particular if overseas transfer charges are imposed on pension transfers to Qrops at the end of this year.
Multitide of benefits
A favoured pension vehicle of UK expats since their introduction in 2006; Qrops unlock significant benefits, including tax relief, and allow expats to consolidate several UK pensions under one-tax efficient roof, which is suited to an individual’s country of residence.
Once in a Qrops pension vehicle, funds are sheltered from UK taxation on income and gains, as well as protected from unforeseen changes in pension rules.
Many also offer multi-currency flexibility, allowing the holder to draw funds in a preferred currency.
Qrops also tend to offer a wider range of options compared to UK pensions with regard to how a pension pot can be invested and have a wider exposure to international, rather than UK, assets.
Compared to traditional UK pension schemes, this international vehicle is much more flexible not only when looking at investment plans but also with inheritance tax in mind.
Brexit casts a shadow
Despite all these advantages, the prospect of Brexit has cast a shadow over Qrops as the preferred vehicle of choice.
With the economic uncertainty and government spending to support the country, the Treasury could look to recoup revenue from UK nationals abroad and possibly significantly modify the benefits a Qrops offers.
As Brexit eliminates the UK´s EU commitments, including freedom of movement of capital, there is still no guarantee that tax free pension transfers will continue post 31 December.
This, coupled with the UK government’s need for extra cash, could prompt penalties and extra taxes on pension transfers.
Some commentators have suggested that a 25% overseas transfer charge could be placed following the December deadline; as well as a tax penalty of up to 55% of the transfer value if payments fall within unauthorised payment rules.
Tax benefits could be eroded
Changes following the 31 December 2020 deadline could also affect the tax benefits retirees currently enjoy.
Although less likely, Brexit could prompt a change in the taxation of UK pensions for expatriates which would not only affect the tax treatment of an individual’s whole pension pot, but also affect the personal allowance too. By moving to a Qrops, expats could be mitigating risks.
Individuals should be aware of the double taxation agreements between their places of residency and the jurisdiction Qrops operates in.
Currently, Qrops is not subject to UK tax, allowing individuals the flexibility to explore financial planning opportunities in their preferred country of residence, but this could change if a deal isn’t reached ahead of the deadline.
With regard to the personal allowance, non-UK residents receive the same allowances for income and capital gains tax as UK residents if they hold a British passport or are an EEA citizen.
However, this could be modified following the December deadline, particularly given the UK government’s need to raise revenue.
There is a good possibility that personal allowance for UK expats could be scrapped, therefore an expat could avoid missing out by transferring their consolidated pension pots into a Qrops.
Key factors to consider
Given that there is no guarantee tax-free transfers will continue following 31 December, now really is the time for those expatriates that would like to consolidate their UK pension pots within a Qrops to do so, particularly as red tape around the process usually means it can take several months.
Nevertheless, although transferring to a Qrops can offer currency and tax benefits or further levels of estate planning flexibility, it is crucial that expats use a fully regulated provider and have several in depth conversations with their advisers ahead of making any decisions.
This article was written for International Adviser by Joanne Leach, senior client director at Strabens Hall.