When it comes to pensions, your long-term financial security is at stake, so you should take extreme care to do what is right for you and your family. Expatriates also need to consider the tax rules and implications in Cyprus.
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 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 also have the option to transfer UK pension funds to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Cyprus residents can transfer UK pensions into a QROPS based in the EU or European Economic Area (EEA) tax-free and go on to receive extremely favourable tax treatment on the income. A QROPS can also offer more flexibility to pass pension benefits to chosen heirs and the option 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 can vary between providers and jurisdictions. Note there is also a 25% UK tax charge on transfers to QROPS outside the EEA. Transferred funds remain liable for five UK tax years, so if you become tax resident in a non-EEA jurisdiction within that time, the initial transfer value will attract the 25% charge. It is important to take professional advice to first establish if transferring is suitable for you and then navigate the complex options.
‘Defined benefit’ or ‘final salary’ pensions
Here, your employer promises a proportion of your salary for the whole of retirement. As benefits last a lifetime and are often generous, these are viewed as ‘gold-plated’ pensions.
While you cannot usually withdraw cash from this type of pension, you can transfer it to a defined contribution scheme or a QROPS. Traditionally, this has been considered less attractive than drawing a guaranteed pension for life. However, today, some struggling providers are tempting members to cash-in with ‘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 final salary benefits.
Whatever type of pension you have, you should consider certain issues before making any decisions.
Through the double tax agreement, most UK pensions are taxable solely in Cyprus. As pension lump sums are not liable for Cypriot taxes, this makes it possible to take portions of your UK pension as cash without paying tax in either country. However, this does not apply if you take the entire fund as a lump sum – if you do, 75% would be taxable in the UK.
Other UK pension income is taxable in Cyprus in one of two ways. You could either choose a flat rate of 5% (with a €3,420 allowance) or add it to your annual income and pay the relevant scale income tax rates. This is zero for income under €19,501, otherwise rates between 20% and 35% apply.
If you are a Cyprus resident and transfer UK pension funds to a QROPS located in a jurisdiction such as Malta, you are able to take your entire pension fund as a tax-free lump sum – in this case under the Malta-Cyprus double tax agreement.
Making your money last
Having 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 do choose to take some or all of your benefits as cash, make sure you have a reliable plan to fund your long-term financial security that suits your personal circumstances and future goals.
The threat of losing it all
Pension scams have never been more widespread and sophisticated – 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. Once you transfer your pension, it is too late.
Also, beware that many companies offering pension services are unregulated. Whether they aim to defraud you or not, unprotected investments risk losing your money, with no recourse if things go wrong.
Even amongst regulated providers, check for quality. The UK Financial Conduct Authority (FCA) found that less than half of those cashing in final salary pensions received suitable advice. Make sure your adviser takes account of your needs, objectives, personal circumstances and risk appetite to find a tailor-made solution for you and your life in Cyprus. While the FCA insists anyone with benefits worth over £30,000 takes regulated advice before transferring, it is an important step for anyone wanting to secure the best outcome for their pensions.
Getting it wrong could have serious and unexpected consequences. Take the time you need to do your research and establish your best approach for a prosperous retirement.
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; an individual is advised to seek personalised advice.
For more financial planning advice visit the Blevins Franks website.