When it comes to pensions, your long-term financial security is at stake, so take extreme care to do what is right for you and your family. Expatriates should also consider the tax rules and implications in Portugal.
Start by understanding the options available for different pension types.
‘Defined contribution’ or ‘money purchase’ pensions
With these pensions, what you are entitled to depends on how much you have paid into the scheme alongside employer contributions, tax rebates and investment growth. Examples include individual or group personal and employer pensions and Self-Invested Personal Pensions (SIPPs).
Since the pension freedoms of 2015, members of defined contribution schemes can usually do the following from age 55:
Take the whole fund as cash – 25% (known as the ‘Pension Commencement Lump Sum’ – PCLS) will be tax-free in the UK.
Make cash withdrawals when you want – unless you have already taken the PCLS, a quarter is free of UK tax each time.
Take regular income through ‘flexible drawdown’, leaving the remainder invested.
Take a secure, regular income for life through buying an annuity.
Expatriates also have the option to transfer UK pension funds to a Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS benefits include more flexibility to pass pension benefits to chosen heirs and to take income in Euros instead of Sterling. Once in a QROPS, funds are protected from lifetime pension allowance penalties and future UK taxation.
However, QROPS benefits and rules vary between providers and jurisdictions. Also, a 25% UK tax charge applies on transfers to QROPS outside the European Economic Area (EEA) or Gibraltar. Transferred funds remain liable for five UK tax years, so if you become tax resident in a non-EEA jurisdiction within that time, the initial transfer value will attract the 25% charge. It is important to take professional advice to first establish if transferring is suitable for you and then navigate the complex options.
‘Defined benefit’ or ‘final salary’ pensions
Here, your employer guarantees a proportion of your salary for the whole of retirement. As benefits last a lifetime and are often generous, these are viewed as ‘gold-plated’ pensions.
While you cannot usually withdraw cash from this type of pension, you can transfer it to a defined contribution scheme or a QROPS. Traditionally, this has been considered less attractive than drawing a guaranteed pension for life. However, today, some struggling providers are tempting members to cash-in with ‘transfer values’ of up to 40 times the annual benefits due at retirement. Although a one-off sum could potentially provide a retirement income that exceeds the original annual payment, it is crucial to fully understand the consequences before giving up ‘gold-plated’ benefits.
Whatever type of pension you have, consider certain issues before making any decisions.
While a quarter of cash withdrawals can be taken tax-free in the UK, they are usually taxable in your country of residence.
Under the Portugal/UK tax agreement, Portugal has sole taxing rights on UK personal and non-government service pensions. Most expatriates with Portuguese residency will therefore escape UK taxes on pension income, but are liable for the progressive Portuguese income tax rates up to 48%. In certain circumstances, however, it is possible to receive up to 85% tax-free.
There is even better news for non-habitual residents (NHR), who can receive UK pension income tax-free, in either country, for the first 10 years.
Making your money last
Having the freedom to withdraw or transfer your pension does not mean that you should. You may even be better off taking no action at this time. If you do choose to take some or all of your benefits as cash, make sure you have a reliable plan to fund your long-term financial future that suits your personal circumstances and future goals.
The threat of losing it all
Pension scams have never been more widespread and sophisticated – Age UK estimates £43 million has been lost to scammers since April 2014. Generally, if an investment sounds too good to be true, it probably is. Once you transfer your pension, it is too late.
Also, beware that many companies offering pension services are unregulated. Whether they aim to defraud you or not, unprotected investments risk losing your money, with no recourse if things go wrong.
Even amongst regulated providers, check for quality. The UK Financial Conduct Authority (FCA) found that less than half of those cashing in final salary pensions received suitable advice. Make sure your adviser takes account of your needs, objectives, personal circumstances and risk appetite to find a tailor-made solution for you and your life in Portugal.
Getting it wrong could have serious and unexpected consequences. Take the time you need to do your research and establish your best approach for a prosperous retirement.
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 is advised to 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.