For many people, pensions are the key to a comfortable retirement. But with Brexit still looming, political uncertainty in the UK and more pension options than ever, it can be difficult for expatriates to establish the best approach. Make sure you are aware of the current pension issues that could affect you.
Many pension providers are vulnerable
Millions of Britons have ‘final salary’ (or ‘defined benefit’) company pensions, where an employer pays a percentage of salary throughout retirement. Widely considered ‘golden’ pensions, the income provided is usually generous and lasts your lifetime.
However, with prolonged ultra-low interest rates and increased life expectancy, the cost of funding these benefits has soared, making it harder for many companies to afford promised payments. Like BHS, companies with significant shortfalls can fail along with their pension schemes.
Members of failed final salary pensions have a safety net with the UK government’s ‘Pension Protection Fund’ (PPF). However, compensation is capped and limited to 90% of members’ benefits (maximum of £36,018 a year at age 65) so will not fully protect everyone.
Transfer values are unusually high
To reduce pension liabilities, many companies are offering final salary pension members large sums (‘transfer values’) to leave. Calculated as a multiple of the future pension payment, some pay-outs have increased from 20x three years ago to up to 40x today – often hundreds of thousands of pounds. Carefully reinvested, such high pay-outs could provide a retirement income that exceeds the original annual payment. Although transferring could potentially prove more beneficial than drawing a guaranteed pension for life, the reverse is more likely, so it is crucial to fully understand the risks and implications before taking any action.
Expatriates can access tax-efficient opportunities
Many expatriates benefit from transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvesting funds into more tax-efficient arrangements for Portugal. Doing this can also offer estate planning benefits and multi-currency flexibility to invest and withdraw funds in euros or sterling. Once in a QROPS or locally-compliant structure, funds are usually sheltered from UK taxation.
QROPS transfers are currently tax-free if both you and the QROPS are based in the EU/EEA (European Economic Area). Otherwise, the UK government charges a 25% ‘overseas transfer charge’. If the UK extends this charge to the EU/EEA region post-Brexit, as many are speculating, there could be a limited time to transfer without tax penalties.
The lifetime pension allowance could catch you out
Once combined UK pension benefits (excluding the State Pension) are valued over £1.055 million, they breach the government’s lifetime pension allowance. Anything over this triggers 55% UK taxation when taken as cash or 25% as income or transferred to a QROPS, regardless of residence. In 2017-18, 4,550 people were caught out, paying £185 million in penalties.
Calculating your lifetime allowance is complex. While £1.055 million sounds like a lot, after decades of pension saving, employer contributions and investment growth, you could go over without realising it. Taking advantage of today’s high final salary transfer values can also risk tipping you over the threshold. Those close to the limit should explore HMRC ‘protection’ options or transferring to a QROPS to avoid or reduce tax penalties.
Quality professional advice is essential
Despite tempting pay-outs and other potential benefits, transferring pensions – whether from a final salary scheme or transferring overseas – is not a one-size-fits-all solution. It is critical to take personalised, professional advice to establish if transferring is suitable for you and navigate the complex options ahead.
Transfers are also a key target for pension scams, so take extreme care and use a UK-regulated provider. For final salary benefits worth over £30,000 a year, the Financial Conduct Authority makes this compulsory, but it is advisable for anyone considering their pension options. Your adviser should take into account your particular situation, needs and goals, as well as the cross-border tax implications, to tailor a suitable strategy for you.
The window of opportunity may be closing
If you decide transferring is right for you, take action soon. Pensions rules can change at any time, but with Brexit and a potential new UK government ahead, reform is much more likely. It is possible, for instance, that the government may make withdrawals more difficult for non-UK residents or introduce extra taxation on overseas pension transfers post-Brexit. In any case, such high transfer values for final salary pensions may not be available for long.
With so much speculation and uncertainty ahead, it is sensible to review your pension arrangements and consider what could work for you now, under current rules, to ensure you can look forward to a financially secure retirement 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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
By Mark Quinn
Mark Quinn is an Associate 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.