One of the few surprise announcements in the UK Spring Budget was the ‘Overseas Transfer Charge’ – an immediate tax on certain transfers to offshore pension schemes. For some expatriates, this could divert a quarter of their transferred pension funds to the UK taxman.
Previously, expatriates could move UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS) without paying UK tax. This applied regardless of residency or where your QROPS was based, unless your total funds exceeded the lifetime pension allowance (currently £1 million). Since March 9, however, under certain circumstances HM Revenue & Customs (HMRC) can automatically claim 25% of funds being transferred – of any value.
While HMRC expect this will only touch a fraction of the approximate 15,000 QROPS transfers each year, they anticipate collecting an extra £315 million by 2022.
Who will be affected?
The good news is that this will not affect most expatriates moving pensions to Portugal, nor those transferring to approved schemes elsewhere.
Specifically, you will not be liable for the tax charge if one of the following applies:
■ Both you and your QROPS are in the European Economic Area (EEA)
■ You and your QROPS are based in the same country outside the EEA
■ The QROPS is run or sponsored by your employer
Currently, the EEA includes all 28 EU member states (including Gibraltar for this purpose) as well as Iceland, Norway and Liechtenstein. So generally only those moving UK pensions to excluded jurisdictions in which they are not resident – such as Switzerland, Guernsey, Monaco or other perceived tax havens – will be liable for 25% taxation. Even so, it is possible to get this tax refunded if their situation changes to meet one of the exemption conditions within five years of transferring.
For expatriates resident in a non-EEA area such as Monaco, liability can be avoided so long as they transfer to a QROPS located in the same place.
The five-year liability trap
Transferred UK pension funds remain taxable by HMRC for five full tax years. So if your circumstances change to bring you in line for the transfer tax, you could still face a 25% tax bill on the initial transferred value. This could happen, for example, if you become tax resident in a non-EEA area within five tax years of transferring.
It could also apply if you move funds from a QROPS to another scheme (an ‘onward transfer’) that does not meet the criteria for tax-free transfers. Other than being based in a non-approved jurisdiction outside the EEA, a pension scheme could invite tax penalties for allowing members to access their funds under the UK age limit of 55.
Note that the five-year clock starts ticking from April 5 following the transfer date. This means that the period for HMRC liability can actually be closer to six years, especially for transfers made on or just after April 6 in any given year.
Before you relocate or move your QROPS, therefore, you should consider the impact on your tax liabilities.
Why consider a QROPS?
Despite this new – albeit avoidable – tax, expatriates transferring to a QROPS can still enjoy significant tax advantages and flexibility over UK pensions.
Once in a QROPS, funds are sheltered from UK taxation on income and gains. Also, your savings will no longer count towards your lifetime pension allowance (LTA), enabling unlimited growth without attracting the 55% or 25% LTA tax penalties.
Another advantage concerns estate planning. While many UK pensions are payable only to your spouse on death, QROPS offers flexibility to include other heirs and roll across generations.
QROPS may also provide greater investment choice and diversification compared to UK pension schemes. They usually offer more freedom to vary your income and hold your savings in multiple currencies. This can potentially insulate pension income from volatility in the Pound and the Euro – especially important during current Brexit uncertainty.
While your pension income may still be taxed in Portugal, with good planning you can usually set up your QROPS to be highly tax-efficient.
However, transferring a UK pension is not suitable for everyone and differences between QROPS providers and jurisdictions could affect the tax benefits. There may be alternative investment structures offering expatriates the same, if not better, benefits to a QROPS.
Something so important as your pension warrants taking regulated, personalised advice to protect your life savings from scams and unsuitable investments. Carefully explore your options and consider acting now – before Brexit triggers further changes – to secure the retirement lifestyle of your choice in Portugal.
Summarised tax information is based upon our understanding of current laws and practices which may change. This article is general in nature and should not be construed as providing any personalised taxation and/or investment advice. Individuals should seek personalised advice.
By Adrian Hook
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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.