With pensions, your long-term financial security is at stake, so take care to do what is right for you and your family. Start by understanding the options available for different pension types.
‘Defined contribution’ or ‘money purchase’ pensions
With these pensions, what you are entitled to depends on how much you have paid into the scheme alongside employer contributions, tax rebates and investment growth. Examples include individual or group personal and employer pensions and Self-Invested Personal Pensions (SIPPs).
Since the pension freedoms of 2015, members of defined contribution schemes can usually do the following from age 55:
- Take the whole fund as cash – 25% (known as the ‘Pension Commencement Lump Sum’ – PCLS) will be tax-free in the UK.
- Make cash withdrawals when you want – unless you have already taken the PCLS, a quarter is usually free of UK tax each time.
- Take regular income through ‘flexible drawdown’, leaving the remainder invested.
- Take a secure, regular income for life through buying an annuity.
Expatriates can also transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS benefits include more flexibility to pass pension benefits to chosen heirs and to take income in Euros instead of Sterling. Once in a QROPS, funds are protected from lifetime pension allowance penalties and future UK taxation.
However, QROPS benefits and rules vary between providers and jurisdictions. Also, a 25% UK tax charge applies on transfers to QROPS outside the European Economic Area (EEA) or Gibraltar, with funds remaining liable for five UK tax years. Take professional advice to establish if transferring is suitable for you and navigate the complex options.
‘Defined benefit’ or ‘final salary’ pensions
Often called gold-plated’ pensions, here your employer promises to pay a proportion of your salary for the whole of retirement.
While you cannot usually withdraw cash from these pensions, you can transfer to a defined contribution scheme or QROPS. Traditionally, this has been considered less attractive than drawing a guaranteed pension for life. However, today, some providers are offering members ‘transfer values’ of up to 40 times the annual benefits due at retirement. Although a one-off sum could potentially provide a retirement income that exceeds the original annual payment, it is crucial to fully understand the consequences before giving up ‘gold-plated’ benefits.
Considering your options
The freedom to withdraw or transfer your pension does not mean that you should. You may even be better off taking no action at this time. If you choose to take your benefits as cash, make sure you have a reliable plan to fund your long-term financial future. Also note that, while a quarter of cash withdrawals can be taken tax-free in the UK, they are usually taxable in your country of residence.
The threat of losing it all
Pension scams are more widespread than ever – Age UK estimates £43 million has been lost to scammers since April 2014. Generally, if an investment sounds too good to be true, it probably is. Also, beware of unregulated companies offering pension services. Whether they aim to defraud you or not, there is no recourse if things go wrong.
Even amongst regulated providers, check for quality. The UK Financial Conduct Authority found that under half of those cashing in final salary pensions received suitable advice. Getting it wrong could have serious and unexpected consequences. Make sure your adviser considers your needs, objectives, personal circumstances and risk appetite to find a tailor-made, tax-efficient solution for you and your life in Spain.
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.
You can find other financial advisory articles by visiting our website here Blevins Franks