After four years of uncertainty, we can now expect Brexit to start taking effect after the transition period ends on December 31, 2020. While nothing should change for UK nationals living in Portugal until then, the countdown is on to prepare.
Once the UK sheds its EU obligations – including freedom of movement for capital – the government gains more scope to tax UK nationals abroad. Pensions are a particularly likely target. With only months to go until things change, there is increasing urgency to review your pension options and take advantage of current opportunities before it is potentially too late.
Although the clock is ticking, take care to consider what would work for your circumstances, plans and retirement goals, as well as the tax implications in both countries.
Transferring your pension abroad
EU residents can currently move UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) free of any personal tax.
Doing this can unlock several advantages, such as consolidating several pensions under one roof, gaining flexibility to take your pension in the currency you need, and freedom to pass benefits to heirs other than your spouse. Once transferred, funds would also be protected from UK lifetime allowance charges, as well as future changes to UK pension rules that may adversely affect you – an increasing possibility after Brexit.
However, the UK imposes tax penalties of 25% on transfers to a QROPS outside the EU/European Economic Area (EEA). There are expectations that the UK may widen this taxation net to include EU/EEA-based QROPS once the transition period ends in December. This could be easily done since the UK legislation is already drafted to catch all pension transfers; the government would just need to remove the EU/EEA exclusion to make this happen. As such, time may be limited to transfer without tax penalties.
Pension transfers can take several months to process, so if you decide that transferring is right for you, act soon – well before the December deadline – to lock in current benefits and avoid unnecessary taxation. The benefits of a QROPS can vary greatly between providers and jurisdictions, however, do take specialist advice to navigate the complex options and determine the most suitable solution for you.
Leaving your pensions in the UK
Of course, you could do nothing and access UK pensions from Portugal. If you have a ‘defined contribution’ (‘money purchase’) pension, current options include taking cash, receiving a regular income (drawdown) or purchasing a lifetime income (annuity).
You cannot usually take ‘defined benefit’ (‘final salary’) pensions as cash; instead you receive a regular income throughout retirement. While you could transfer to a defined contribution scheme for more flexible access, this is likely to be less beneficial than receiving a guaranteed income for life.
Note that UK pension payments are usually only paid in Sterling. If you are living in Portugal and your spending is in Euros, you could find that conversion fees and the variable exchange rate reduces the value of your pension income.
Remember also that UK pensions remain subject to UK rules, which can change at any time. UK funds are also vulnerable to lifetime allowance penalties of 25%/55% when combined pension benefits exceed £1.055 million.
The tax implications
If you are Portuguese resident, UK pensions (excluding UK government service pensions) are generally only taxable in Portugal, not the UK. When taking lump sums, cash or income from a UK pension or QROPS, the Portuguese scale income tax rates apply, ranging from 14.5% to 48%.
If you have non-habitual resident (NHR) status, you can receive UK pension income tax-free for your first decade in the country – so long as it can be proven to be an income (i.e. taken over a period of at least 10 years). However, the Portuguese government has signalled it may start taxing foreign pensions for new non-habitual residents in 2020 – this could take immediate effect once the 2020 budget is confirmed.
Establishing the best pension strategy for you
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 proceed with care and take regulated advice to protect against pension scams. An adviser with cross-border expertise is best placed to help you establish the best approach for you and your family’s particular situation in Portugal.
While there is no one-size-fits-all answer for what to do with your pension, everyone can benefit from reviewing their arrangements as early as possible in 2020, 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 Mark Quinn
Mark Quinn is a Partner of Blevins Franks in Portugal. He holds a Bachelor’s Degree in Finance, a level 4 Diploma in Financial Planning (DipFA) from the Chartered Insurance Institute (CII) and is a Chartered Financial Planner.