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Transferring your pension to a QROP

By David Hattersley - Topics: Pension Lump Sums, Pensions, Pensions in Spain, QROPS, Spain
This article is published on: 31st August 2022

31.08.22

Deja-vu, why urgent action is required to transfer your pension to a QROP

A sense of deja-vu is now apparent as the UK is experiencing a similar situation compared to the 70’s. Drawing comparisons especially for those that lived through that era would be unhelpful. However a minor point worth considering were the restrictions on the flow of capital out of the UK. For those lucky enough to travel abroad then a limit of £25.00 cash per person was the restricted limit under the Exchange Control Act 1947. My wife still has her old passport with form PP/A dated 14.02.73. One of her clients of 100 years still remembers how difficult it was to bring money into Spain to buy a plot of land.

For those that already are living in Europe or plan to in the very near future under the golden visa rules, I am not suggesting a wholesale restriction of capital movement . A difference though between the 70’s and now is the growth in personal wealth, with the primary asset being property.

The 2nd biggest asset and perhaps underrated was the growth of money purchase pensions after Mrs Thatcher came to power and for those in their 50’s & 60’s this could be quite considerable. The opportunity to “ distance work “ may have an impact on younger professionals and for those relocating here.

The current government is under extreme pressure, especially the need to raise tax revenue to balance the books, along with the alleged reports of threats to tear up all agreements with Europe.

One politically “safe option” and unlikely to cause uproar and outrage by the general public would be to curtail or even stop transfers to a QROP for those lucky to live or move to Europe.

Why would the government do this ? The payment of a pension held in the UK could be taxed at source as are the current Civil Service Pensions, thereby retaining the long-term tax revenue stream. It would mean filing tax returns both in the UK & Spain. The pension commencement lump sum could also come under review. There certainly wouldn’t be a public outcry for those “ lucky” enough to have sizeable pension pots.

QROPS

The UK Budget Bill normally has to be debated and passed into law which takes about 3 months. In 2015 negative amendments were made to the QROPs rules that took effect immediately on the day after the budget and was quietly “slipped in”. A case of “ the devils always in the detail”! After all the principle of if one can get away with it once, why not try to repeat a similar process again?

There are many advantages in transferring to a QROPs and at The Spectrum IFA Group we offer and recommend a thorough assessment and report of your individual situation by our qualified specialist at no cost to you. An additional benefit is the long-term service provided as UK based advisers can no longer provide this for residents in Spain and the individual can retain control via a local adviser. A transfer to a QROP doesn’t only apply to UK nationals but any European worker that has built up a “pension pot”.I have been heavily involved in the pensions market since 1987 and have a wealth of experience in this field so if you have any concerns or interest please contact me to arrange a no-obligation initial meeting.

Temporary Annuities in Spain

By Charles Hutchinson - Topics: Pension Lump Sums, Pensions in Spain, QROPS, Spain, UK Pensions
This article is published on: 19th May 2022

19.05.22

Over the last few years, there have been some well-known IFAs here in Spain advising their clients that they can save up to 88% on their income tax in Spain by stating that their pensions are temporary annuities. In some cases, this has caused serious problems for pensioners. There is no way the Hacienda would offer such benefits unless these annuities were such from outset. It would seem logical if this was to be set up as such from outset, the schemes would have to be domiciled here in Spain for the tax reasons I go on to explain. Similarly, the annuity status could not be applied to foreign pension schemes being exported by expatriates from their previous country of residence when they come to live here.

For example, I have come across clients who have transferred their pension abroad under QROPS rules, they then instruct their trustees to pay them a set income for, say, 5 years. In some cases, the trustees would give them a certificate confirming that this income is a temporary annuity. Ironically this not only potentially makes the trustees as culpable as the pensioner but so too the gestor or accountant drawing up that tax return.

An annuity is something you buy from a financial institution (usually a life assurance company) for a certain sum. In return, the company will pay you an income for life or a fixed period. Once purchased, that money is no longer yours and it is irreversible.

However, the money in a pension scheme (although legally owned by the trustees) is for your benefit in your lifetime and can be passed to your beneficiaries or spouse, depending on the scheme T & Cs. The income can be stopped, restarted, raised, lowered, or even taken in lump sums (again depending on the scheme particulars). The capital remains at your disposal. Therefore it cannot be regarded in any way as an annuity, let alone a temporary one.

QROPS

Those who promote these “loopholes” are tapping into one’s natural desire to lower one’s taxes. They are exploiting genuine tax benefits offered to those who have already paid income tax on their savings with which they purchase an annuity for a fixed period. The special low tax rates which go with these annuities are by way of partial compensation for having your tax-paid capital repaid to you. Whereas pension income is always taxed at your marginal rate, mainly because there is tax relief on monies you put into your pension scheme, with both money purchase and occupational pensions. Furthermore, pension “pots” are invested and will attract, if properly invested, investment growth.

Those companies who advise people to do this and those who file a tax return claiming their pension is an annuity (when it clearly is not) are committing tax fraud. And there are very heavy fines for doing such a thing. A tax audit can go back up to 5 years and the tax shortfalls can involve sizeable sums especially when the fines are included. At pension age, this can be very distressing and a very nasty shock to an elderly person.

Spectrum can help you avoid this situation by reviewing any previous advice given and offering an unbiased opinion. We research our products and taxation thoroughly before advising our clients. If you have any doubts about your pension and the advice you have already received, then please contact me for an initial meeting which carries no fee. We want you to have peace of mind so that you can tell others about us. Spectrum is not in the risk business but very much here to protect your wealth.

Taking a Lump Sum from your Pension when Resident in Spain

By Chris Burke - Topics: Barcelona, Pension Lump Sums, Pensions, Spain, UK Pensions
This article is published on: 13th April 2019

13.04.19

*UPDATED 1st January 2020

There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).

To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.

If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction. To clarify, it is the value the contributions have accumulated to today that is tax exempt, not the amount of actual contributions made back then.

From January 2007 there is no tax exemption, zero. Therefore, any contributions made from this point receive no tax exemption, however if the contribution to the pension runs before and after this date the tax exemption is calculated the same way.

If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £150,000
Amount to be taken in lump sum/one off: £50,000
Amount tax exempt in Spain: £20,000
Pension lump sum amount income taxable: £30,000 (added to your annual income tax band)


Now if we look at the UK example we shall see the difference:

Total amount of pensions: £150,000
Amount to be taken in lump sum: £50,000
Amount tax exempt in UK: £37,500
Pension lump sum amount income taxable: £13,000 (added to your annual income tax band)

 

However, in the following scenario the Spain example works more in your favour:

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £40,000
Pension lump sum amount income taxable: £60,000 (added to your annual income)

 

UK Example

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £25,000
Pension lump sum amount income taxable: £75,000 (added to your annual income tax band)

Important points to note here are:
If you cash in your UK pension OVER 25% and are registered in the UK as a non resident, an emergency tax code is likely to be used up to 45% and you will have to claim back what is owed to you. Unless you are able to provide a P45 from the current tax year following withdrawal from employment and/or current pension plan,

or

The pension provider already holds a P45 or up to date cumulative tax code received from HMRC as the result of previous withdrawals from that pension plan, and can apply it.

If you take your UK pension as a 25% lump sum, this should be declared in Spain and would apply to the Spanish rules of 40% being tax exempt and the rest income taxable. You would therefore pay any tax owed in Spain.

Only the FIRST Lump Sum is tax exempt so it’s important to realise that and make sure you plan effectively.

Regular payments from your pension fall under income tax

From 2007 onwards there is NO tax exemption of this kind.

Top Tips For Your Pension Lump Sum/One Off
When taking your lump sum, take it in the year that is most tax efficient for you, such as when you have lower income from other sources.

Moving your pension outside the UK could give you more freedom, more choices and potentially less tax to pay in the long term (depending on your situation).

Source: Silvia Gabarró GM Tax Consultancy Barcelona