Pensions are often the key to long-term financial security, so it is crucial to take extreme care when deciding what to do here. Expatriates have the added complication of factoring in the tax rules of two countries, as well as the potential for Brexit to limit the opportunities available.
So what are today’s options for Britons living in Portugal?
‘Defined contribution’ or ‘money purchase’ pensions
This includes most personal and employer pensions and Self-Invested Personal Pensions (SIPPs). Since the pension freedoms of 2015, members of such schemes can usually do the following from age 55:
■ Take the whole fund as cash, technically called the ‘Pension Commencement Lump Sum’ (PCLS) – 25% will be tax-free in the UK.
■ Make cash withdrawals when you want – a quarter is free of UK tax each time (unless you have already taken the PCLS).
■ Take regular income through ‘flexible drawdown’, leaving the remainder invested.
■ Take a secure, regular income for life through an ‘annuity’.
UK pension payments are usually paid in sterling, so retirees living in Europe could find that conversion fees and variable exchange rates reduce the value of pension income.
Expatriates have the option to transfer UK pension funds to an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free. QROPS advantages include flexibility to pass pension benefits to chosen heirs and take income in euros or sterling. Once in a QROPS, funds are protected from future UK taxation, including lifetime allowance penalties.
However, QROPS benefits and rules vary between providers and jurisdictions. There is also a 25% UK tax charge on transfers to QROPS outside the EEA (European Economic Area). Many believe the UK government may tax EU/EEA transfers after Brexit, so if you are considering transferring, act now. Make sure you take specialist advice to establish if transferring is suitable for you and navigate the complex options.
‘Defined benefit’ or ‘final salary’ pensions
Here, your employer guarantees a proportion of your salary for the whole of retirement. While you cannot usually withdraw cash, you can transfer benefits to a defined contribution scheme or QROPS. Traditionally, this has been considered less beneficial than drawing a guaranteed pension for life. However, some providers have been offering higher than usual ‘transfer values’ to reduce their future pension liabilities. Sensibly reinvested, a high one-off sum could potentially provide a retirement income that exceeds the original annual payment, but it is crucial to fully understand the consequences before giving up lifetime benefits.
In any case, you should consider various issues before making pension decisions.
While 25% of cash withdrawals can be taken tax-free in the UK, if you are Portuguese resident they are usually taxable here, as is other UK pension income. The exception is UK government service pensions – including teachers, local authority, army, police and civil service pensions – which remain taxable in the UK only.
Portuguese residents accessing UK pensions or QROPS income will attract progressive Portuguese income tax rates ranging from 14.5% to 48%. If you qualify for non-habitual residency (NHR), however, you can receive UK pension income completely tax-free – as long as it can be proven to be an income (e.g. taken over a period of at least 10 years). This ‘at least 10 years’ requirement is new, following recent legislation that indirectly requires pension income to be taken as income, not capital.
For the best results and to avoid an unexpected tax bill, take specialist, cross-border advice before making any pension decisions.
Making your pensions last
Having the freedom to withdraw or transfer your pension does not mean that you should; you may be better off taking no action at this time. If you do choose to take some or all of your benefits as cash, ensure you have a reliable plan to fund your long-term future that matches your personal circumstances and goals.
Beware that pension scams have never been more widespread and sophisticated – if an investment sounds too good to be true, it probably is. Make sure any company you are dealing with for pension services is regulated with the UK Financial Conduct Authority (FCA). Remember: unprotected investments risk losing your money, with no compensation if things go wrong.
Even amongst regulated providers, check for quality. The FCA found that less than half of those transferring final salary pensions received suitable advice. Your adviser should take account of your needs, objectives, personal circumstances and risk appetite to find the best solution for you and your family. Getting it wrong could have serious and unexpected consequences.
Take care to explore your options now – before Brexit potentially changes the landscape – to establish your best approach for a prosperous 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.
By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.