Reviewing your pension options in the face of Brexit
It makes sense for British expatriates to adapt their financial planning for their life abroad. By taking advantage of opportunities available for Portuguese residents, you can potentially reduce taxation and gain more flexibility than UK-based alternatives.
Does the same apply to pensions? If you are permanently living in Portugal, should you bring your UK pensions with you?
There is no right answer, as everyone will have their own set of requirements, plans and goals for their retirement. However, it is highly likely that pension opportunities for expatriates in the EU will change once the UK leaves the bloc. With Brexit only months away, there is an increasing urgency to review your options before they potentially disappear.
Leaving your pension in the UK
One option is to do nothing and access your UK pension from Portugal.
If you have a defined contribution (‘money purchase’) pension, you can access your funds in various ways. You could, for example, take cash in one lump sum or several withdrawals, receive a regular income until it runs out (drawdown) or purchase a lifetime income (annuity).
Defined benefit (‘final salary’) pensions, on the other hand, are company pensions that provide a regular income for the whole of retirement. While you cannot usually access benefits as cash, you can never run out of funds – payments will continue for the rest of your life. On death, reduced lifetime payments are usually redirected to your spouse, if applicable.
If you have not started taking your defined benefit pension, you have the option to transfer benefits to a defined contribution scheme for more flexible access. Take care, however, as transferring could be less advantageous than receiving a guaranteed income for life.
There is concern that some UK pension payments will stop next March in the event of a ‘no-deal’ Brexit. Under current rules, many UK financial providers may lose the right to operate within the EU, potentially making it illegal to pay benefits to Britons living in Portugal.
However, this outcome can be avoided if new cross-border arrangements are established in time. Many British retirees in non-EU countries like Australia and Canada, for example, are able to legally receive their UK pension today without any problems.
In any case, funds transferred to a QROPS will not be affected (more on this later).
Also note that UK pension payments are usually only paid in Sterling. If you are living in Portugal and your spending is mostly in Euros, you could find that conversion fees and the variable exchange rate reduces the value of your pension income. As we have seen, the value of the British pound is highly vulnerable during these times of Brexit uncertainty.
Transferring your pension abroad
Residents in Portugal can move UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free.
Doing this can provide flexibility to take your pension in the currency you need and freedom to pass on benefits to heirs other than your spouse. Funds would also be protected from future changes to UK pension rules that may adversely affect you – an increasing possibility after Brexit.
Beware, however, that the UK imposes tax penalties of 25% if you transfer to a QROPS outside the EU/European Economic Area (EEA). With no approved QROPS in Portugal, you would need to select an eligible scheme in an EEA country like Malta to avoid losing a quarter of transferred funds to UK taxation. There are expectations that the UK could even widen this taxation net to include EU-based QROPS post-Brexit.
Note also that the benefits of a QROPS vary greatly between providers and jurisdictions – and fees can be relatively high – so take specialist advice to determine the most suitable solution for you.
The tax implications
UK pensions (excluding UK government service pensions) are generally only taxable in Portugal if you are Portuguese resident. Non-habitual residents can receive UK lump sums, cash and income tax-free. For others, the scale income tax rates up to 48% apply (the same tax treatment applies to QROPS withdrawals).
Depending on your situation, it may be more beneficial to reinvest your UK pension funds into an alternative tax-efficient structure that is compliant in Portugal, so make sure you explore your options.
Your pension is likely to be central to your long-term financial security, so it is crucial to take care and only use regulated providers to protect against pension scams. An adviser with cross-border expertise is best placed to help you establish the best approach for your circumstances and goals.
While there is no one-size-fits all answer for what to do with your pension, everyone can benefit from reviewing their arrangements now, before Brexit reshapes the landscape.
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.
By Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.