Our pensions are often key for our long-term financial security, but, unfortunately, they are complex. Deciding what to do with yours involves navigating various options, establishing how they suit your objectives, researching the tax implications and weighing up the pros and cons.
UK pension and tax regulations change regularly, often impacting British expatriates, and foreign tax regimes are rarely straightforward. Keep up to date on reforms in both countries to review your retirement planning as necessary and make informed decisions.
Lasting a lifetime, the longevity factor
How long will you live? And your spouse? Without a crystal ball this is an unknown factor in financial planning, but an essential one nonetheless because you need your money to last as long as you do – you need to plan for living to a ripe old age.
When you consider that often it is necessary for the wealth of a deceased spouse to pass to their surviving partner to continue having sufficient money to live on, the need for a financial planning road map is especially important.
Studies show that many people, including affluent households, often overestimate how long retirement savings will last. While you may always be able to afford basic living necessities, your later retirement lifestyle could fall well below expectations.
Much depends on the type of pension you have. A pension providing a secure income for life can give you peace of mind. Other options provide the opportunity for your funds to grow, but you need to carefully manage investment risk and the rate of withdrawal from the pension fund to meet your income needs.
The inflation, income and investment factors
Recent years have reminded us how much inflation can impact our spending power. While we cannot predict inflation rates in our future years, even low levels reduce the value of savings and income over the long-term. It is essential to plan ahead for it, for both our pensions and investment capital.
The last few years have not been kind to retirees, with the rising cost of living and the possibility of investment portfolios being lower too. In this environment, people may be tempted to draw higher amounts from their pension fund.
When combined with longevity, the impact of spending too much in the short term (especially when portfolio returns are lower than average) can affect the long-term value of your funds and the ability to meet future income requirements. This, in turn, can cause a dilemma for retirees who need to meet today’s needs while protecting their future needs as well.
With a sensible portfolio and drawdown plan, this can be effectively managed. The key is to understand your financial needs – the amount required to cover day-to-day and one-off expenses such as holidays or a new car. Then review and adjust your plan to cater for the year-to-year increases in the cost of living and portfolio performance over time.
The tax factor
When weighing up the options for drawing your UK pension as an expatriate, it is important to take the tax implications in Portugal into consideration.
Most UK pension income is subject to Portuguese taxation if you are resident here. The key exemption is income from government service pensions, which remains liable to UK income tax. Non-residents currently still benefit from the UK £12,570 personal allowance (assuming they do not receive ‘disregarded income’ treatment).
The UK’s 2023 budget abolished the pensions lifetime allowance and resulting tax charges. However, with effect from April 6, three new allowances – the ‘lump sum allowance’, ‘lump sum death benefits allowance’ and ‘overseas transfer allowance’ – are scheduled to come into effect. If these affect you, you’ll need to plan for the tax implications.
The advice factor
Pensions are personal so establish a solution that works for your circumstances, needs and objectives.
Since they are complex and making a wrong decision could impact your retirement security, you need to take professional, regulated advice. In any case, the UK rules require this for certain pension transfers.
The problem for UK nationals living in Portugal is that most UK advisers are not regulated to give advice to EU residents – they lost their ‘passporting’ rights with Brexit. Unless they have taken steps to be correctly regulated here, they should not be advising you.
Even without this issue, it’s important to get local advice in Portugal. Most UK-based advisers do not have an in-depth understanding of Portugal taxation, which can result in you paying much more tax than you need to.
Find a qualified advisory firm which is regulated to provide advice on UK pensions in Portugal and who has the specialist cross-border advice you need – a thorough knowledge of UK pension regulations and of both UK and local taxation and the interaction between them.
The 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 should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.