The pros and cons of transferring your UK pension
Qualifying Recognised Overseas Pension Schemes (QROPS) are foreign schemes approved by the UK government to receive tax-free transfers of UK pension funds – making it easier for expatriate Britons to move with their retirement savings. However, QROPS are by no means a one-size-fits-all solution. Here we explore some advantages and disadvantages.
Currently, Portuguese residents can transfer one or more UK pensions into an EU/EEA-based QROPS without taxation, while transfers outside the bloc attract the 25% UK ‘overseas transfer charge’. There are expectations for the UK to extend this within the EU/EEA after Brexit, so time may be limited for tax-free transfers.
Once in a QROPS, funds are sheltered from UK taxes on income and gains and no longer count towards your lifetime pension allowance (LTA), allowing unlimited growth without 25% or 55% LTA penalties.
QROPS funds only become taxable once you start taking benefits in your country of residence. Portuguese residents will attract the progressive Portuguese income tax rates ranging from 14.5% to 48%. However, if you are a non-habitual resident (NHR), so long as you withdraw your funds over a minimum of 10 years, you can enjoy tax-free pension income for your first decade in the country.
If you do not qualify for NHR, it may be more beneficial to reinvest UK pension funds into an alternative tax-efficient structure suitable for Portugal, so explore your options.
While UK pensions can be restrictive, many QROPS allow you to take cash or income, however and whenever you want. You could, for example, draw a higher income in early retirement and reduce it in later years, or take a lump sum and preserve the rest for a rainy day.
However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.
Diversification and investment choice
QROPS usually offer more options than UK pensions for how your money is invested and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite.
As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.
Estate planning flexibility
While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.
QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still attract local succession taxes.
While UK pensions only pay out in sterling, some QROPS allow you to invest funds and make withdrawals in more than one currency. This is a major advantage for British expatriates as it reduces dependence on pound/euro exchange rates and removes currency conversion costs.
Freedom from UK rules … to a point
Funds in a QROPS are no longer governed by UK pension legislation, so are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer funds again to an unapproved scheme within five tax years, or if you permanently return to the UK within 10 years.
Note also that the goalposts for QROPS are highly likely to shift in the future, especially after Brexit. Since their inception in 2006, HMRC has made numerous revisions to the rules and delisted thousands of QROPS from various jurisdictions. For example, currently there are no Portuguese schemes on the HMRC list of approved QROPS, so expatriates here need to choose an eligible scheme in another EU/EEA country – such as Malta or Gibraltar – to avoid transfer penalties.
Where HMRC deems that its rules have been broken, it can charge a 55% tax penalty on the transfer amount – potentially even if you had moved funds before the rules changed.
Regulated, tailored advice is crucial
Overseas pension transfers are a complex area – and a key target for pension scams – so regulated advice is essential. Take care to explore your full range of options – before Brexit potentially changes things – to establish the most suitable pension solution for your particular circumstances.
If you decide to transfer, make sure you take specialist, professional guidance to find a suitable product, navigate the cross-border tax and jurisdiction issues, and ultimately secure your long-term financial security in Portugal.
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 Adrian Hook
Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.