How to Brexit-proof your UK pension

A new UK law means that the transfer of a UK pension to another country could incur a 25% tax. Fortunately, there are ways to mitigate this tax burden. Read on to find out how.

Whatever the version of Brexit – soft or a hard – there are likely to be more changes to the taxation of UK pensions

In 2006, UK pension holders earned the right to take their pensions abroad without penalty by becoming a member of a QROPS (a Qualified Recognised Overseas Pension Scheme). This right was driven by the European Commission and the fundamental freedoms that underpin the freedom of movement of capital, people and pensions within the European Union, as enshrined in the Maastricht Treaty.

What is a QROPS?

A QROPS is an overseas pension scheme that conforms to HMRC’s (Her Majesty’s Revenue and Customs – the UK tax office) rules, which determine where a pension scheme can be located. A QROPS is similar to a UK-registered pension scheme, but with tax benefits.

What is the effect of the UK’s new law?

Since 2006, British expats and expats of other nationalities with UK pensions – who were concerned about high pension taxes, currency risks, UK pension deficits and inheritance laws – moved billions of pounds worth of UK pensions abroad to more pension-friendly destinations via a QROPS.

Alarmed by this flow of pensions out of the UK, HMRC has created several controls to stem that flow. The latest – introduced in the March 2017 Budget – is a 25% tax on the transfer of a UK pension into a QROPS. However, this tax burden can be mitigated if, from the point of transfer of the pension from the UK to the overseas jurisdiction, one of the following conditions are met:

•  both the individual pension holder and the QROPS are in the same country; or

•  both the individual pension holder and the QROPS are within the European Economic Area (EEA) – but not necessarily in the same EEA country. (The EEA includes all EU countries plus Iceland, Liechtenstein and Norway. Gibraltar is included (as part of the UK), but Switzerland is not, as it is not part of the EEA.)

Tax on your pension can be mitigated by moving it to a QROPS

What effect is Brexit likely to have on UK pensions and QROPS?

It’s not yet certain what will happen once the UK has extricated itself from the EU, and Brexit is completed in 2019. However, it is thought likely that the UK’s HMRC will continue its effort to increase revenue levels through further taxation of pensions. One way will be to apply the rules that it currently uses for pension transfers to the rest of the world to those now made to EEA countries. In other words, the 25% tax could be applied to EEA jurisdictions.

Can I still move my pension abroad and benefit from a QROPS?

Yes, you can still move your pension abroad, providing there is a local QROPS available to you, for example in one of the EEA countries or Hong Kong. (You can check the HMRC’s list of QROPS countries here.)

What are the main benefits of a QROPS?

There are five key benefits of a QROPS:

1. No UK tax payable on pension income

2. 100% of fund goes to beneficiaries on death

3. No lifetime allowance – so your pension can grow to any size

4. Higher lump sum withdrawal than a withdrawal from a pension held in the UK

5. Currency and investment options: hold and invest the funds in any currency

There are options available to secure your retirement income from your pension

What if a QROPS is not available where I live?

If a QROPS is not available where you live, there is another pension plan option that you might consider called an International Self Invested Pension Plan or SIPP. There are several benefits of a SIPP, including:

• Ability to take control of your pension: how and what it is invested in.

• Full access to your pensions from the age of 55.

• Not being subject to the UK pension 25% transfer charge.

• An international platform to manage your currency risks and investments.

• Protecting yourself from the pension deficits of a Final Salary Scheme.

• Possibility to crystalize your pension at the age of 55 to help minimise any Lifetime Allowance Charge implications.

• Ability to pass on your full Final Salary Pension to your beneficiaries.

• You can transfer the SIPP to a QROPS if you move to an appropriate jurisdiction.

Under a SIPP, your pension will still be under the UK’s jurisdiction, but you will have control and from age 55, when freedoms apply, you can take it abroad.

Seek professional advice

Pensions are a complex area of personal income, particularly for expats dealing with more than one tax jurisdiction. It’s therefore considered wise to contact a pension specialist to discuss and review the best pension options for your personal situation.

This blog was sponsored by Forth Capital. To set up a FREE review of your UK pension and the best pension options for you, simply complete Forth Capital’s online form and one of their expat Pension Specialists will contact you.