Could the UK government take up to 60% of your pension?
The Institute for Fiscal Studies (IFS) published a paper on 15th December 2022 recommending that the UK government introduce a basic rate (20%) income tax charge and Inheritance Tax (IHT) at 40% on monies left in UK pensions on death, regardless of age.
How much could the UK tax my pension?
By Portugal team - Topics: Pension in Portugal, Pensions, Portugal, Tax on Pensions, UK Pensions
This article is published on: 6th February 2023
Could the UK government take up to 60% of your pension?
Generosity of current rules
Under current rules, your pension can pass to your beneficiaries free of UK Inheritance Tax (IHT), rather than being subject to the standard 40% rate. Additionally, if you die before age 75, your beneficiaries do not need to pay any tax on drawdown/lump sums. If you die after 75, and your beneficiaries are UK tax resident, they are subject to income tax at their marginal rate.
This is what makes pensions so valuable for tax planning and advisers will usually recommend that they are maximised and preserved, and that other assets subject to IHT are used to fund spending first, to reduce the value of your estate.
What could change?
The IFS pointed out that the current tax rules on UK pensions are very generous and pensions have become a succession planning tool rather than one for retirement provision.
Experts are musing that the UK government could change these generous IHT rules; many say this is overdue. More worryingly, they are anticipating a potential change in 2023.
The IFS recommended that a basic 20% rate is applied to any pension savings left on death, irrespective of age. Also, the pension should form part of the deceased’s estate for IHT, incurring a further 40% tax.
Why the change?
Simply put, changing the pension IHT rules would fill a big hole in the Exchequer’s coffers by bringing millions of pensions into the IHT net. It would also persuade many people to start spending their pension pots and in turn, pay income tax on the drawdown during their lifetimes.
The report explained how the generous UK pension rules specifically in relation to IHT have caused a “bizarre situation” where instead of pensions primarily being an attractive structure for old-age-planning, they have become a lucrative IHT loophole. The IFS also pointed out, “if we are to have an inheritance tax at all, it should apply evenly across all forms of wealth.”
We have also seen pensions being periodically targeted over the past decades, with taxation and limits applied in the form of Annual Allowance, Money Purchase Annual Allowance and the continuing reduction of the Lifetime Allowance, from £1.8.m in 2011/2012 to £1,073,100 in the tax year 2022/2023 – all with the aim of curbing the tax benefits. There are even serious talks of bringing the increase in the UK State Pension age forward from 2046 to 2035.
Will this affect you?
Those with estates valued in excess of £325,000 (if single) or £650,000 (jointly), including pension values, would be affected by any potential change.
It is unclear how any potential change would be introduced, although the IFS has suggested phasing in changes. It is also unclear if existing benefits would be sheltered from the change or if the rules would be retrospective, thus catching all pension savers. Although, the IFS did say that even with phasing, there would be some retrospective taxation effect.
What should you do?
Of course, there is no guarantee this will happen, but if changes are imposed there may be little or no opportunity to restructure your pensions. As a non-UK resident, you can take action now and review your finances to ensure you are protected.
What is a QNUPS, do I need one?
By Mark Quinn - Topics: Pension in Portugal, Portugal, QNUPS
This article is published on: 10th October 2022
Qualifying Non-UK Pension Scheme (QNUPS) was introduced by HMRC in 2010. In simple terms, it is a type of international pension that must adhere to certain HMRC rules to be recognised by HMRC. A QNUPS should not be confused with a QROPS (Qualifying Recognised Overseas Pension Scheme). This week, we will discuss the basics of QNUPS for Portuguese tax residents.
When might you need one?
Investors that have diverse investment needs may benefit as they can hold a wider range of assets than a traditional pension or QROPS. For example, it is particularly beneficial for holding residential UK property or for more adventurous investments such as a collection of fine wine or racehorses. But for the average investor looking to save towards or draw income for their retirement, this is unlikely to be a benefit worth paying for, there are alternative structures that could be more suitable.
Contributions paid to a QNUPS do not benefit from tax relief which is a disadvantage for savers who have qualifying contributions. However, the contributions to a QNUPS do not count towards the UK Annual Allowance, so can be a great way to save pension benefits in excess of £40,000 p.a. (2022/2023).
Are there really advantages?
The UK Inheritance Tax (IHT) advantage is not a reason to establish a QNUPS, and if set up for these purposes, HMRC may view this as tax avoidance and there could be severe tax consequences and we have seen penalties of up to 200% for failed schemes. It must be set up for genuine retirement purposes e.g. the individual could not contribute to a regulated pension.
Tax-free roll-up within the structure: this is also a benefit of UK-based pensions and other non-pension savings structures available in Portugal. A transfer to QNUPS is not required to achieve this.
Income tax benefits: all foreign retirement income will benefit under Non-Habitual Residence (NHR). Post NHR, depending on how the pension was funded, income can be taxed at scale rates of income tax, as an annuity or as a long-term savings vehicle. You do not need a QNUPS to access such benefits and it is worth noting here that there are non-pension-based investments that offer significant tax advantages, irrespective of NHR status.
Death benefits: in Portugal, only Portuguese-based assets are subject to Stamp Duty on death if the recipient is a non-directline ascendant or descendant. So, this tax can be avoided (if assets are passing to non-immediate family) by keeping any pension or investment structure outside of Portugal. You do not need a QNUPS to access this.
Currency options: Most EU-based savings and pension schemes can offer flexible currency investment and income options.
Cost: consolidation of assets can bring about cost savings, but a QNUPS requires a ‘platform’ or savings vehicle within it to hold investments. This adds an extra layer of cost to a client think carefully if the additional cost is worth the benefits of a QNUPS.
Income provision: you must take benefits from a QNUPS during your lifetime, you cannot leave the whole fund untouched as a tax-free legacy to your beneficiaries. This must be considered post-NHR when pension income can be aggressively taxed.
Political and legislation risk: QNUPS are based on UK legislation and in order to benefit from the UK IHT advantages must continue to do so, so are still at the mercy of the UK’s political and legislative regime.
QNUPS are a beneficial structure if used in the right circumstances however if miss sold, they can be expensive and unnecessary, as well as have a negative tax impact on death.
If you have or are considering a QNUPS and wish to discuss the cost and suitability for your circumstances, please contact us.
Can I keep my UK pension as a Portuguese resident?
By Mark Quinn - Topics: Pension in Portugal, Portugal
This article is published on: 26th September 2022
I’m asked the above question by many clients, and the short answer is – yes. Whether it is the best thing to do however is something that should be looked into on a case-by-case basis with a qualified pension specialist.
Here, we will look at the general tax position of UK personal pensions, Self-Invested Personal Pensions (SIPP), defined benefit schemes and qualifying recognised overseas pension schemes (QROPS) for Portuguese tax residents and the restructuring options available.
For Portuguese tax residents, the income tax position of having a UK pension scheme and a QROPS is the same. During NHR, pension income will be taxed at 10% or 0%, depending on your NHR status. Post-NHR, generally the income will be subject to scale rates of tax.
From a UK perspective, generally, UK pension income will not be taxable in the UK and you can request to have it paid out to you in Portugal gross. This will avoid the onerous process of claiming back tax at source from HMRC. I say generally because if you have a UK-based government scheme e.g. civil service, military or certain NHS schemes, the UK retains the taxing right and the income will always remain taxable in the UK.
All pension income, irrespective of which country has the taxing right, must be declared in Portugal if you are a resident there. You will receive a tax credit for any tax paid to HMRC, so you will not have to pay tax twice on the same income.
There is no UK taxation on overseas pensions held by Portuguese tax residents as there is no UK dimension to consider.
The death tax position between having a UK-based pension and a QROPS is also the same i.e. both will be outside of your estate for UK Inheritance Tax purposes.
From a Portuguese perspective, as long as the scheme is not Portuguese based, it will not attract Stamp Duty (10%) on death.
What are the options?
Your options will depend on the type of pension you have, the scheme rules and whether you have already taken income or not, but generally, your options will be:
- Keep your UK pension as it is
- Transfer to alternative UK personal pension or SIPP
- Move to a QROPS (Qualifying Recognised Overseas Pension Scheme)
Choosing to do nothing can be just as detrimental to your pension value as being misadvised, particularly in the long term. You should conduct regular reviews (at least annually) and address aspects such as your risk profile, capacity for loss, income requirements, rebalancing or switching underlying investments, and changes to your objectives and family circumstances.
Why would you consider a transfer QROPS?
QROPS is something that is pushed on expatriates by many offshore advisers as this is how fees are generated, and although the advice itself may not be ‘bad’, it might not be the ‘most appropriate’. So, if you are considering transferring to a QROPS we recommend that you get several opinions and ensure you only take advice from appropriately qualified advisers and reputable firms.
QROPS tends to be more expensive than UK based pension schemes because of the international dimension. For some individuals, a QROPS is the right thing but for others it is an unnecessary expense.
Some instances where a transfer to a QROPS could be beneficial are:
To reduce currency risk: a UK pension scheme will inevitably be denominated in Sterling, and this will involve regular currency conversions to meet spending needs in Euros. If the Sterling/Euro rate is low then your purchasing power diminishes. This leads some to look at overseas pensions which can be denominated in Euros or a mixture of most major currencies.
If you are in excess, or close to, the UK Lifetime Allowance (LTA): for 2022 the UK LTA is £1,073,100. The trend over the last couple of decades has seen the LTA continually reduce.
Once you exceed the LTA, the excess is taxed at either 25% or 55% depending on how the income is taken. You cannot avoid this tax, as even if you do not access your pension, you will be tested against the LTA at age 75. Likewise, if you do access your pension before age 75, your benefits will be tested again at age 75 effectively taxing any growth since you first accessed your pension benefits.
The UK LTA cap does not apply to overseas schemes, so a transfer out can be beneficial for those close to, or over the LTA.
Qualified professional advice
You have worked your whole life to fund your retirement savings, and many are reliant on this to provide an income into old age or to provide a legacy to loved ones. Ensure you speak to the right people to protect your wealth. Spectrum has in-house pension specialists and can offer a complimentary and impartial analysis of your pension schemes.
We are Chartered Financial Planners (CII, UK) and Tax Advisers (ATT, UK) with a wealth of experience in both the UK and Portugal providing cross-border advice. You can contact us through the form below or by phone on +351 289 355 316 or by email at firstname.lastname@example.org / email@example.com.
How is my pension taxed in Portugal?
By Mark Quinn - Topics: Pension in Portugal, Portugal, Tax in Portugal
This article is published on: 30th November 2021
Should I review my pensions if I live in Portugal?
Pensions are somewhat a confusing area in Portugal and the tax system does not easily accommodate the many different types of pensions individuals may have. We have seen many professionals report pensions in different ways, depending on their interpretation or understanding of the pension in question.
As there are many types of pension schemes and ways of funding them, maybe with overseas or UK elements, this area can be quite tricky to navigate and it is best to seek advice from a professional with a proper understanding of the details.
Speaking generally, for those with NHR, UK pension income is taxed at a flat rate of 10% in Portugal, unless you successfully applied for NHR before April 2020, in which case it is free of tax.
For normal residents, pension income is generally taxed at scale rates. There are some exceptions to this for example, annuities or certain pensions that are treated as long-term savings.
UK pensions are usually taxed at source but in most cases, you can ask your pension provider to make payments out to you gross; this avoids you having to reclaim the tax paid at source from HMRC. You will need to inform your pension administrator that you are no longer UK resident and obtain an ‘NT’ tax code.
The UK State Pension is taxable in Portugal and you can also ask for this to be paid out to you gross.
UK government service pensions are always taxable in the UK e.g. civil service, armed forces. Portugal does not tax these pensions or include them as income for reporting and tax purposes.
Taking your ‘tax free cash’
An important point in relation to the taxation of pensions is with regard to the pension commencement lump sum (PCLS) and withdrawals under “pension freedoms” arrangements.
In the UK, it is possible to take a lump sum of up to 25% of the value of your defined contribution (e.g. a personal pension or SIPP) pension pot tax free. A tax-free amount is also available from a defined benefit scheme (final salary scheme) pension although this uses a different calculation method. Please note, these PCLS amounts are not tax free in Portugal. As a general planning point, we would therefore suggest utilising any PCLS entitlement prior to becoming Portuguese tax resident. However, your personal circumstances will dictate the best course of action.
We recommend that your pensions are reviewed regularly and at least on an annual basis.
This is a highly regulated and complex area that should only by undertaken by suitably qualified professionals.
If you would like to discuss your pension, are concerned about charges or performance, or would like to know if moving or adjusting your pension is the right thing for you, please contact us.