Viewing posts categorised under: QROPS
QROPS Pension Transfer
By Chris Webb
This article is published on: 20th March 2017
If you ever worked in the UK, no matter what your nationality, the chances are you were enrolled in a private pension scheme. The UK government continues to tweak legislative changes affecting the expat’s ability to move this pension offshore. On the surface, these changes appear to limit transfer options, but in reality they have strengthened the legal framework offering expats continuing advantages.
Background
When you leave the UK your private pension fund remains valid but is frozen, or deferred, until you reach retirement age. The pension income you then receive is taxable in the UK no matter where you are based in the world. Once you die the pension will continue in the form of a spouse’s pension if you are married; otherwise it will cease. When your spouse dies, all benefit payments come to an end.
If you take any part of your fund and then die before you fully retire, a lump sum can be paid to your spouse.
In April 2006 Her Majesty’s Revenue and Customs (HMRC) introduced pension ‘A’ day. This liberalised UK private pensions and allowed people leaving the UK to transfer them overseas, often to a new employer. In doing this the UK complied with European legislation which allows all citizens the freedom of movement of their capital. Thus ‘Qualified Recognized Overseas Pension Schemes’ (QROPS) were born.
Recent Chamges 2017
During the March UK budget there was a very unexpected announcement regarding pension transfers out of the UK. The headline was :
“HM Revenue & Customs (HMRC) has announced that Qualifying Recognised Overseas Pension Schemes (QROPS) transfers for individuals not in the European Economic Area (EAA) will be hit with a 25% tax charge”.
At first glance it sent shockwaves through all concerned with pension transfers, after a moment to digest the news it became much clearer that there were exceptions to the rule, detailed below:
1. The QROPS Trustee is in the EEA and the client/member is also resident in an EEA country (not necessarily the same EEA country);
2. The QROPS and the member is in the same country; or
3. The QROPS is an employer sponsored occupational pension scheme, overseas public service pension scheme or a pension scheme established by an International Organisation (for example, the United Nations, the EU, i.e. not just a multinational company), and the member is an employee of the entity to which the benefits are transferred to its pension scheme.
It is also important to understand that if a client was to move outside of the EEA within 5 years of the transfer then the tax rate would apply.
In most of the cases I deal with this new tax ruling will not affect the transfer. Since moving to Spain all but one of the transfers I have implemented are EU based.
Implementation
QROPS are not necessarily the right thing in every single case. In order to decide whether it would be advantageous to transfer your pension or leave it in the UK, with the intention of drawing the benefits in retirement, please contact me so that I can carry out a personalised evaluation. There may be compelling arguments, outside of the evaluation alone, which are often overlooked and may affect you in the future.
One of these is that a large number of UK schemes are currently in deficit to the point that they will be unable to pay future projected benefits. This would mean that even though it looks as though there are arguments to leave your UK pension in situ it may actually be wiser to transfer it.
In order for you to make the best decision you need to professional advice on what would be the best situation for you. This will entail seeking details of the current UK schemes, including transfer values, the types of benefits payable to you and options going forward when you get to a retirement date and when you die.
Advantages & Disadvantages of a Transfer Between a QROPS and a SIPP
Advantages
Lump Sum Benefits
QROPS – If you transfer your benefits under the QROPS provisions to a Malta provider, in accordance with the rules of this jurisdiction, you may be able to take a pension commencement lump sum of up to 30% (unless you have already taken this lump sum from the UK pension). Under the current HMR&C (Her Majesty’s Revenue and Customs) rules to qualify for the lump sum option you must be age 55 or over. Your remaining fund is then used to generate an income without having to purchase an annuity. The 30% pension commencement lump sum is only available once you have spent 5 full, consecutive tax years outside of the UK (in terms of tax residence), if you are within the first 5 years, we strongly advise you to limit the pension commencement lump sum to 25%. From 6 April 2017 this 5 year period has been extended to 10 years.
SIPP – The maximum Pension Commencement Lump sum from a SIPP would be 25%.
No Liability to UK Tax on Pension Income
QROPS – This will be paid gross and you declare the income in the country you are resident in as long as the QROPS jurisdiction has a Double Tax Treaty (DTT) with the country that you are resident in. Transferring under the QROPS provisions ensures that, if tax is due on pension income, it will only be taxable in the country of your residence.
SIPP – This should be able to be paid gross, although many clients find this to be a very awkward process to solve as the pension company does not always talk to the HMRC and therefore at least for the first year or two the pension is paid net of basic rate tax and sometimes even on an emergency tax basis. This can be reclaimed, but will involve more paperwork than that of a QROPS.
No Requirement to Purchase an Annuity
There is no longer a requirement to ever purchase an annuity with either your UK pension or in the event you make a transfer under the QROPS provisions. Therefore the rules below are the same for a QROPS and a SIPP.
With both a QROPS and a SIPP the maximum age you must start to draw an income is from age 75. The Pension commencement Lump Sum must be taken by this age or the option to take it after this age is lost.
The budget changes in the UK has meant that from April 2015 the restrictions imposed from drawing a pension income from a UK Pension Plan will be scrapped. This means that investors will be able to take the whole of their pension as a lump sum if they wish from age 55. The first 25% would be the standard Pension Commencement Lump Sum but the remaining amount would be subject to your marginal rate of income tax. The Malta QROPS have now followed these changes to allow full flexibility also.
This would not be possible with a Final Salary pension. It would need to be transferred to a SIPP or QROPS to utilise these options.
Secure Your UK Pension Pot
Some defined benefit schemes in the UK are in deficit. Since the deficit forms part of the balance sheet of the company, this can present a huge risk to your pension fund.
Transferring your UK benefits to a SIPP or QROPS provisions could enable you to have full control of these funds without worrying about the financial situation of your previous employer.
Ability to Leave Remaining Fund to Heirs
QROPS – All death benefits will be paid out from the Malta QROPS with 0% death tax no matter what age an individual is.
SIPP – The recent UK Budget has changed how death benefits will be paid to their heirs in the future. If death occurs before age 75 then any remaining balance in a pension fund can be paid tax free to any beneficiary. Otherwise if a member passes away after the age of 75 then there would be a tax charge, any lump sum benefit would be subject to the beneficiaries marginal rate of income tax.
A transfer under the QROPS provisions will allow the member to leave lump sums without deduction of tax to heirs no matter what age they pass away, so it is clear and simple. (this is not applicable to Defined Benefit schemes). The below table shows the situation more clearly.
Defined Benefit Plans
UK Pension –
(generic pension benefits) |
|
|
|
Scenario |
Death Benefits |
| SRA |
Married couple 1st to pass away |
50% income to Spouse |
|
Married couple 2nd to pass away |
0% of total plan |
|
Single but with grown up children |
0% of total plan |
|
Lump sum to future heirs |
0% of total plan |
| QROPS- Malta |
|
|
|
Scenario |
Death benefits |
| SRA |
Married couple 1st to pass away |
100% of fund value to any beneficiary |
|
Married couple 2nd to pass away |
100% of fund value to any beneficiary |
|
Single but with grown up children |
100% of fund value to any beneficiary |
|
Lump sum to future heirs |
100% of fund value to any beneficiary |
SRA – Selected Retirement Age
The tables are based on the usual death benefits being taken in retirement. Some plans may have slightly different death benefits which may be higher or lower than 50% income provided on death and guaranteed periods for the first 5 years. Please check the exact benefits within your scheme for a full exact comparison.
Currency
A standard UK pension will usually only be invested and pay benefits in Sterling, which means the member runs an exchange rate risk in respect of pension income, in addition to incurring charges in converting the pension payments to the currency of their country of residence.
A transfer under the QROPS provisions means that the pension payments can be made in the local currency, thus potentially eliminating exchange rate risk.
Lifetime Allowance Charge (LTA)
QROPS – There is no LTA charge within a QROPS so transferring larger plans to a QROPS may not be caught in this reduction in the future. Careful planning will be needed with your adviser if you are close to the limit in the UK. (a transfer to a QROPS is a crystallisation event, so will be tested against the LTA at that stage, any benefits above the LTA at time of transfer will be subject to a 25% tax liability.
SIPP – This is a restriction on the total permitted value of an individual’s total accrued fund value in UK registered pensions, currently £1m. Those who exceed this value face a potential tax liability of 55% on the excess funds on retirement at any time when there is a “benefit crystallisation event” that exceeds the LTA. A benefit crystallisation event is any event which results in benefits being paid to, or on behalf of, the member and so includes transfer values paid to another pension scheme, as well as retirement benefits.
Disadvantages
Charges
QROP & SIPP If you have a pension(s) with a combined transfer value of less than £50,000 then the charges may be prohibitive.
Loss of Protected Rights
QROPS & SIPP – A transfer may result in the loss of certain protected rights, including Guaranteed Annuity Rates, Guaranteed Minimum Pension, a protected enhanced lump sum, or rights accrued under a defined benefit scheme. (These are shown in the section “Analysis of Your Existing Pensions”).
Returning to the UK
If you return to the UK, then the QROPS administrator will have to report this ‘event to HMRC and the pension scheme will become subject to UK pension regulations again.
If it is your intention to return to the UK in the near future then a transfer under the QROPS provisions is usually inappropriate. If this was the case then we can help with our UK SIPP offering which may be more appropriate.
UK PUBLIC SECTOR PENSIONS, BREXIT AND ITALIAN CITIZENSHIP
By Gareth Horsfall
This article is published on: 1st March 2017
01.03.17
I was watching a nature documentary with my son the other day and we were watching the foraging activities of grizzly bears in North America.
It was interesting from the perspective that they will forage across huge distances in search of different food types to ensure they get the proteins, minerals and vitamins they need to stock up for the long winter ahead of them.
In some ways this behaviour reminded me of the foraging that I sometimes embark upon, across the internet, to ensure that you have all the information you need to weather the seasons ahead. We have lived through some spring and summer seasons, metaphorically speaking, but politically we seem to be entering autumn and possibly winter, depending on your point of view of course. I imagine for those people I know who voted BREXIT, that this is a new dawn. However, I will stick with my view for the purposes of this blog.
FORAGING
I was foraging through the internet last week in search of some information on UK pensions and happened to stumble across an Italian fiscal website which had a summary of the Italian tax treatment of pensions from around the world.
To my surprise, my eyes fell across the following statement in relation to pensions paid from Argentina, UK, Spain, the USA and Venezuela:
‘Le pensioni private sono assoggettate a tassazione solo in Italia, mentre le pensioni pubbliche sono assoggettate a tassazione solo in Italia, se il contribuente ha la nazionalità italiana.’
WHAT DOES THIS MEAN?
In short, and what caught my eyes was specifically in relation to the tax treatment of public section pensions in Italy.
…….le pensioni pubbliche sono assoggettate a tassazione solo in Italia, se il contribuente ha la nazionalità italiana.’
(Public sector pensions would be those defined as local Government, doctors, nurses, police, firemen, armed forces, teacher etc).
If you are a holder of one of these types of pensions and are resident in Italy, you will likely know that under the double taxation treaty with the UK, in this case, that public sector pensions are only taxed in the UK, for those who are no longer UK resident and are therefore not subjected to taxation in Italy.
However, the above statement implies that if you are an Italian national then this pension would be taxed in Italy. (Taking into account any double taxation credit that would need to be applied). Therefore, Italian tax rates would apply and the pension would not benefit from the application of the UK personal allowance, in Italy, either.
This is clearly important, given BREXIT, and the number of people who were considering or making application for Italian citizenship as a means of resolving the issue of residency. Italian citizenship would define you as an Italian national and tax would apply to a UK public service pension.
DOUBLE TAXATION TREATY
Without wanting to take the words of a website as hard evidence, I did some more foraging and can confirm the words of the double taxation treaty (UK/Italy) as follows:
(2) (a) Any pension paid by, or out of funds created by, a Contracting State or a political or an administrative subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or local authority thereof shall be taxable only in that State.
(b) Notwithstanding the provisions of sub-paragraph (2)(a) of this Article, such pension shall be taxable only in the other Contracting State if the individual is a national of and a resident of that State.
THE BREXIT PROBLEM JUST KEEPS GETTING BIGGER
So, here we have another BREXIT problem which has now arisen as part of further investigation. I would suggest that Italian citizenship, for those with UK civil service pensions, needs to be thought out carefully and planned financially, before any action is taken.
What will happen in 2017?
By John Hayward
This article is published on: 23rd January 2017
23.01.17
There cannot be many people who were able to answer this question accurately in 2016. There were many “shocks” most notably the Brexit vote and the election of Donald Trump as President of the USA. There were several celebrities who died in 2016 but, more importantly, we may have lost loved ones which had financial implications, aside from the grief.
There are many events already planned for 2017 but I suggest that in December our conversations will focus on aspects that are not already known by the vast majority of people.
How do we cope with the unknown?
Our role, at The Spectrum IFA Group, is to help people cope with all things financial. With interest rates at such a low level, banks have little to offer, especially to the cautious investor. In fact, Spanish banks have an additional problem since the European Court of Justice ruling in December. They could face billions of euros in refunds due to inequitable “floor clauses” they had in their mortgage agreements.
Here are some of the ways we help:-
Improved exchange rates – banks may not charge for currency exchange but often offer poor rates. We can help you protect your income today as well your capital in the future.
Higher income/returns on investments – Whether a cautious or speculative investor, we have access to some of the top investment companies. With their expertise, they are able to make financial decisions prior to an event. Most people will react to an event when it is too late.
Tax friendly and compliant investments – We specialise in providing access to products that are tax efficient in the country of tax residence and which are portable within the European Union. This means an investment, whether this is a personal arrangement or a QROPS/ROPS (Overseas pension scheme), is tax efficient wherever the policyholder lives.
Registered and regulated in Spain – With the upcoming Brexit, it is possible that companies, who are not registered in Spain, or in other EU countries, will not be able to function. The Spectrum IFA Group has a Spanish company that holds a licence in Spain. Once the UK leaves the EU, companies based in the UK and Gibraltar may no longer be able to operate and service their clients in Spain.
Back to the question. We deal with the unknown by being prepared. This generally means applying caution and care. It means having access to experts who can react much quicker to events, if not predict them. We live where you live and so, if something needs dealing with urgently, we are available
Should you cash in your final salary pension?
By Chris Burke
This article is published on: 14th December 2016
14.12.16
Potentially millions of people with defined benefit or Final Salary pensions have seen their transfer values shoot up in the last year.
A transfer value, also known as a CETV (cash equivalent transfer value) can be exchanged for giving up the future projected benefits for your pension. In effect, the company buys back the pension.
Over the last 18 months in particular these values have soared.
In many instances people are being offered tens of thousands of pounds more than a year ago with some even being incentivised by their Pension scheme to leave, with a bonus given for doing so. The main reason for this is that the pension company no longer wants the responsibility of having to pay the pension when you retire. Life expectancy in Europe now is 84/85 and in effect people are living longer, meaning the pension scheme has to pay you longer.
For someone with an annual pension income worth £20,000, it is not uncommon to be offered 30 times that amount – in other words, £600,000 in cash.
However this is not the right thing to do for everybody, and there can be significant disadvantages.
‘Unique Circumstances’
Many people have seen their pension transfer values doubled since two years ago, now making it very worthwhile to re-visit these and see what the best advice would be, given this growth in values.
What is a defined benefit pension and the difference between these and a Defined Contribution pension scheme?
Workers with defined benefit pensions know exactly how much they will receive in retirement. Such schemes are either based on a worker’s final salary, or on their career average earnings. Workers with defined contribution (DC) schemes save into a pension pot, which they then use to buy a retirement income. The size of the pot depends on stock market performance. The reason for the increase in transfer values is continuing low interest rates, and particularly low Gilt Rates. Gilts are bonds issued by the Government to raise money, and the rate/interest of these is a major factor used to help calculate a transfer value for a DB pension scheme.
Pension schemes depend heavily on bond yields for their income, and with yields at record lows, many are struggling to meet their commitments to pay future pensions. So they have been offering larger and larger sums to people who are prepared to give up their pension rights.
Transferring your DB/Final Salary pensions can offer a more flexible retirement income, the possibility of extra tax-free cash and upon death the remainder of the pension can be paid out to any beneficiary’s rather than paying a reduced income only to a spouse/dependent partner and then ending.
However, keeping a DB/Final Salary pension can also offer you certainties such as an income for life with Inflation protection, Risk-free income, which does not depend on the ups and downs of the stock market.
There are currently major uncertainties surrounding Brexit and the UK leaving the EU, particularly for those people living outside of the UK. With the almost constant review and changes of UK pensions laws/taxes and the fact that 90% of UK DB/Final Salary schemes are underfunded, it’s important you review your options and the right decision with your pension.
In all circumstances, you should talk to a professional and have your own pension/situation evaluated and see what the best advice there is for you.
Pensions Time Bomb
By Gareth Horsfall
This article is published on: 3rd November 2016
03.11.16
It could be said that uncertainty is the nemesis of good long term financial planning and living in today’s world you could be forgiven for throwing your hat in and tucking yourself away for a few years: Hard Brexit, Soft Brexit, Donald Trump, Italian Constitutional Referendum, German and French elections, the rise of nationalism, and the list goes on.
However, time always marches on and we either get left behind or plan forward. No one has ever complained to me (yet) about finding ways to legally save tax, finding ways to save money, getting better investment returns, or having more money then they had planned for.
So with this in mind I want to return to a subject which I have touched on a few times before but which has been hurled back to the top of the financial planning priority charts: UK Final Salary Pension Schemes.
This article is specifically for anyone who holds any type of corporate final salary pension plan. (It does not relate to the UK state pension or UK government pension schemes, eg Teacher, Doctor, Army etc).
Starting with the bad news
I want to break some bad news to holders of those historically ‘gold plated’, final salary pensions schemes. The schemes that promise you a certain level of income based on your last few years salary level with your employer.
They are no longer gold plated!
This is quite a complex area to try and explain, but let me try and sum it up in a nutshell.
When the population starts living longer and the pension scheme can’t ask anymore contributions from the new members (without crippling them financially), then the cost of looking after the existing retirees for a much longer time than the scheme had anticipated (due to medical advances), becomes much greater than the net new money being put into the scheme.
If this were a family, it would be in debt. A mortgage, it would have defaulted. A company, it would have gone bankrupt.
Another problem is that these pension schemes need such a secure income stream to pay the retirement incomes of the retirees that they have to invest the scheme assets in safe, but incredibly low yielding asset such as Government Bonds.
And there you have the problem. If you make very attractive promises to retirees, based on your calculations many years ago, but the financial landscape changes dramatically during that time, then your original calculations are now totally obsolete. More money out than coming in spells TROUBLE!
Examples:
If you want to know how bad this situation is, then take a look at these figures. (These show the market value of the company in billions, versus the liability of their long term pension obligations, ‘IN BILLIONS’. The figures are staggering)
|
VALUE |
PENSION LIABILITY |
| BAE Systems |
£15.802bn |
£29.236bn |
| RSA Insurance |
£4.332bn |
£7.126bn |
| British Telecom |
£36.657bn |
£51.210bn |
| Sainsbury |
£4.946bn |
£7.696bn |
| Rolls Royce |
£10.572bn |
£11.564bn |
| RBS |
£39.954bn |
£35.152bn |
These are the worst in the UK. If these companies had to legally honour their pension liabilities, they would be bankrupt.
But, let’s not be silly about things. The Government would never let companies like this go bankrupt, so they allow them to continue to operate the pension funds off their balance sheets.
And, to make it even more enticing they allow them another ‘get out clause’…outright default!, right into the UK Pension Protection Fund. A UK Government run scheme which guarantees to pay the pensions (up to certain limits) in the event that the company says it can no longer do so.
The burden moves to the taxpayer!
However, as low interest rates and retirees living longer wreck their long term calculations, more and more pension schemes are opting to close down and place their members under the Pension Protection Fund. As more and more members apply, the burden becomes greater on the UK public purse. Do they cut the maximum amount of pension you could receive? What about the benefits you might lose?
These are all very serious questions for people who are currently members of final salary pensions.
However, there is some potential light at the end of the tunnel. A transfer away from the scheme, with a lump sum from which you can invest and take income from, as though you had your own personal pension.
The advantages and disadvantages have to be weighed up but with more schemes in financial difficulty there is a distinct possibility that it might be worth your while.
NOW! is the time to find out the value of your pension
Low interest rates and stress on the pension fund means that transfer values out are at historical highs. The companies are happy to rid themselves of you and will pay handsomely to do so, and the low interest environment means the transfer out values are much higher than you might imagine.
But low interest rates will not continue forever. Brexit and the fall of GBP will create inflation and that means interest rates will have to rise.
Get the information now before it is too late
Lastly, let’s leave things on a good note. If the benefit of transfer out is clear and present after an analysis of the situation, then you can also pass your income onto your spouse/partner, and/or leave the asset to your family on death. The benefits are not lost when you die.
There are benefits on both sides of the argument and we provide a FREE analysis to advise our client whether to transfer or not. If you want to look into this area of your retirement plans and potentially secure your long term income stream, then you can contact me
Should you consider transferring your Final Salary Pension Scheme?
By Peter Brooke
This article is published on: 10th October 2016
10.10.16
There have been a number of recent changes within the UK economy and UK pension rules that make a review of any pension(s) essential for those living or planning to live outside the UK. Final Salary pension schemes (also referred to as Defined Benefit schemes) have long been viewed as a gold plated route to a comfortable retirement, however there are likely to be large changes ahead in the pension industry. The key question is; will these schemes really be able to provide the promised benefits over the next 20+ years?
Why Review now?
Record high transfer values
– Gilt rates are at an all time low. This has caused transfer values to be at an all time high, some transfer values have increased by over 30% in the last 12 months.
Scheme Deficits
– Actuaries Hyman Robertson now calculate the total deficits on remaining final salary pension schemes as £1 Trillion!
TATA Steel/BHS
– Recent examples show that these very large deficits cause a number of problems, in particular no one wants to purchase these struggling companies as the pension deficits are too big a burden to take on.
– Could the Government be forced to change the laws to allow schemes to reduce benefits? A reduction in the benefits will reduce the deficits and make the companies more attractive to purchasers. There is a strong argument that saving thousands of jobs is in the national interest, if that just means trimming down some of these “gold plated benefits”.
Pension Protection Fund (PPF)
– This fund has been set up to help pension schemes that do get into financial trouble, two points are key. Firstly it is not guaranteed by the Government and secondly the remaining final salary schemes have to pay large premiums (a levy) to the PPF in order to fund the liabilities of insolvent schemes. As more schemes fall into the PPF there are fewer remaining schemes that have to share the burden of this cost. Their premium costs will increase as there will be fewer remaining schemes to fund the PPF levy.
– It is likely the PPF will end up with the same problems as the final salary schemes, they won’t have the money to pay the “promises” for the pensioners. Additionally the PPF will most likely have to reduce the benefits they pay out.
Pension changes that have already happened
Inflationary increases have already been permitted to change from Retail Prices Index (RPI) to Consumer Prices Index (CPI), this change looks reasonably small, but over a lifetime this could
reduce the benefits by between 25% and 30%.
– In April 2015 unfunded Public Sector pension schemes have removed the ability to transfer out, so schemes for nurses, firemen, military personnel, civil service workers etc. can no longer transfer their pensions. Now these are blocked, it will be easier to make changes to reduce the benefits and no one is able to respond by transferring out.
– When this rule change was being discussed the authorities also wanted to block the transfer of funded non-public sector schemes, i.e. most corporate final salary schemes. There is therefore a risk that transfers from all final salary schemes could be blocked or gated.
Autumn Statement (Budget)
– This is on 23 November 2016. Could the Government make any further changes to Pension rules? When Public sector pensions were blocked there was a small window of time to transfer, however most people couldn’t get their transfer values in time as the demand was so high. People who review their pensions now may at least have time to consider options.
– Could Brexit end the ability to transfer pensions away from the UK? – this is still unknown, but Pensions are often a soft target of government taxation ‘raids’.
Reasons why schemes are in difficulty:
Ageing population – people now expect to live around 27 years in retirement, when these schemes commenced the average number of years in retirement was 13 years.
Lower Investment Returns – Investment returns have not been as high as expected, also there has been a very large reduction in equity (shares) content in final salary schemes, this is now around 33%, in 2006 the average equity content was 61.1%.
Benefits were too good – Simply, many of the final salary schemes were too good. In 2016, if you became a member of a 1/60th scheme then your company would need to add 50% of your salary to make sure the benefits can be paid. Clearly this is unrealistic.
What could happen in the Future?
– An end to the ability to transfer out of such schemes
– Increase the Pension Age, perhaps in line with the increase of the State Pension
– Reduction of Inflation increases, (already started as many now increase by CPI instead of RPI)
– Reduction of Spouse’s benefit
– Increase of contributions from current members
– Lower starting income
Concerns over effect of BREXIT on expat pensions
By Graham Keysell
This article is published on: 5th July 2016
05.07.16
The decision by UK voters to leave the European Union could have far-reaching consequences for pensioners living abroad.
This is especially the case for those receiving UK state pensions, but who are living in another EU member state.
The main uncertainty is whether state pensions will continue to benefit from annual increases.
As at September 2014 there were 1.24 million people receiving British state pensions but living outside the UK.
Approximately 560,000 expat pensioners live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the amount it was when they left the UK.
Is it going to be the case that British expats living in EU countries such as France or Spain will find themselves in a similar position?
Since 1955, pensions have been paid worldwide, but there was never any mention of annual increases.
However, in the period to 1973, reciprocal arrangements were made between the UK and 30 other countries, which allowed for annual increases to be paid in certain countries. This was seen as making it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.
Very few new agreements have been signed since, possibly because the EU rules meant that there was no need for them between EU countries.
Pension increases
Pensioners living in the EU, Norway, Iceland and Liechtenstein do get increases, but there is no guarantee that this will continue following Brexit.
Inevitably, the UK government will be tempted to save money by ending the increases to pensioners living in the EU.
It is already estimated that the Treasury saves around half a billion pounds a year from pensioners excluded from the increases. This could easily double if pensioners in the EU were to be treated similarly.
The number of overseas voters still on the UK electoral register is negligible, so the government might decide that upsetting these people would have a very modest negative effect. One result could be that more expats would get themselves back on to the UK electoral register (if it were possible for them to do so).
There is also the question of people who are planning to retire to a EU country in the future. They might show their dissatisfaction at the ballot box.
Another reason for the government might not stop the increases is the possibility of large numbers of pensioners living in the EU finding that they have no choice but to return to the UK
If access to free healthcare in the host country was also abolished, the UK government could easily find that significant numbers of pensioners return to the UK, which is a situation it would want to avoid.
For this reason, it is to be hoped that state pension increases will be paid, and there will almost certainly be considerable pressure on the government to find a way to preserve the existing system.
The New UK State Pension
By Spectrum IFA
This article is published on: 23rd May 2016
23.05.16
The new UK State pension scheme has now come into effect from 6th April 2016. Widely publicised by the government as being easier to understand, based on the questions we are getting, this is not the case!
If you reached State Pension Age (SPA) before the start of the new scheme, then you are not affected by the changes – even if you have decided to defer taking your State pension. Under the ‘old scheme’, the basic State pension is £119.30 per week for 2016/17, based on having 30 years of National insurance Contributions (NICs) or credits. You may also be entitled to some additional State pension and the amount varies according to your earnings during your working life and whether or not you were ‘contracted-out’ of the State Earnings Related Pension Scheme (SERPS) or the later State Second Pension (S2P). The maximum additional pension entitlement is around £164 per week.
The new State pension scheme introduces a ‘single-tier’ pension of £155.65 per week for 2016/17, based on having 35 years of NICs (or credits). So anyone starting work today, who retires with a 35-year NIC record, can expect to get the full amount of the single-tier pension and nothing more. Of course, this is subject to the rules not being changed for the next 35 years!
However, for people who have already built up a NIC record before 6th April 2016 and have not yet reached SPA, the transitional arrangements are complex. Some will get more than the single-tier pension, others will get less, and here is where the confusion begins!
If you fall into this ‘transitional group’, as a first step, your State pension under the old system is calculated as at 5th April 2016. This includes your basic pension plus any additional pension that you are entitled to receive and this known as your ‘Starting Amount’. You cannot get less than this amount.
So even though you may not have 35 years of NICs, it could be that under the old system, your Starting Amount is actually more than £155.65 per week. If so, you will receive the higher amount, but you cannot build up any more State pension, even if you continue to pay NICs. The difference between your Starting Amount and the single-tier pension is known as your ‘Protected Amount’ and this will be increased by reference to inflation.
However, there are many people who have a Starting Amount that is less than £155.65 per week. Typically, these are people who were contracted-out of the additional State pension scheme and thus, paid a lower rate of NICs and/or do not have the 30 years of NICs required under the old scheme. Hence, many of these people are asking if they should pay voluntary NICs to increase their State pension entitlement up to the single-tier amount.
For those over age 55, it is possible to get an estimate of your new State pension entitlement from the Department of Work & Pensions. One of my clients (let’s call her Jane) did this recently.
Jane has paid NICs for 25 years before coming to live in France. She has about 10 years to go until she reaches SPA and before the new scheme was introduced, she had planned to pay 5 years of voluntary NICs to secure entitlement to the full basic State pension, but to do this closer to her retirement. However, now she is 10 years short of the full 35-year record and so she is not sure now what she should do.
The letter that she received from the DWP confirmed that she was entitled to a State pension in the new system of £138 per week, based on her existing NIC record to 5th April 2016. As she only had 25 years of NICs, around £96 of this was basic pension and £42 was additional pension.
Under the new State scheme, you get £4.44 per week for each year of NICs (£155.65 / 35). Jane thought that she needed to pay 10 years of NICs to get the full single-tier pension of £155.65. However, this would add £44.40 per week (£4.44 x 10) to her Starting Amount, resulting in a total amount of £182.40. As this is greater than £155.65, the excess would be lost. Therefore, the maximum amount that Jane can purchase is £17.65 per week and so she only needs to purchase 4 years.
To purchase extra years, you have to pay voluntary Class 3 NICs and the rate for 2016/17 is £14.10 per week. A full year of NICs at this rate of £733.20 would increase your State pension by £230.88 per annum. In effect, this is not a bad ‘annuity rate’ and one has to question whether or not such generosity from the government is really sustainable over the long-term? A problem to be faced by a future government and not the current one!
In Jane’s case, it is 10 years until she will receive her State pension and we have seen constant change in the UK pensions arena – last year the major reform in private pensions and now the reform of the State pension. It cannot be ruled out that more changes will take place in the future, particularly as concerns the period needed to qualify for full pension and the age at which the State pension starts. There is every possibility that Jane could pay the voluntary NICs now, only to find that the ‘goalposts’ are moved again during the next 10 years.
Everyone’s situation is different. Hence, whether or not it is a good idea to pay voluntary NICs to increase your State pension will vary from one person to another. In any event, such a decision should only be considered as part of a wider review of your overall financial situation and taking into account other retirement provision that you already have in place.
If you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the UK State pensions system, the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter
Retiring in Spain with a UK State Pension – How does it work?
By Chris Burke
This article is published on: 7th March 2016
07.03.16
Many people understand that the UK is in the EU (for now at least) and therefore when you retire, it should be simple to understand how you claim your State and personal pensions. The main questions people have are what pension will you receive, how will you receive this, where should you be paying your taxes and how when retired, can you receive your pension in Euros and what could happen if you don’t have this organised correctly?
Over the last few years this has changed and, as of now, works in the following way.
Never worked in Spain but retiring here
In this scenario, having never paid Spanish taxes you will receive the UK State pension by contacting the HMRC on the following links:
How to check what State pension you have
www.gov.uk/check-state-pension
How the State Pension works
www.gov.uk/state-pension
How the new state pension will work
www.gov.uk/new-state-pension
How to claim your state pension online
www.gov.uk/claim-state-pension-online
Early retirement and State Pension
www.gov.uk/early-retirement-pension
You will be able to find out exactly what you will be entitled to and how it works. UK State pensions are always paid gross and never taxed, it is your duty to report this in your annual earnings whichever country you are resident in and along with your income, pay the relevant tax. State pension does come under the tax bracket as income tax.
www.gov.uk/tax-uk-income-live-abroad
You can choose to have your UK State pension paid into a UK bank account in sterling, or into a Spanish account in Euros at the rate of exchange that day (i.e. almost no costs for doing this).
If you have a private or company pension scheme in the UK, you should register on the following link and make sure this is also paid gross to you:
www.gov.uk/government/publications/double-taxation-united-kingdomspain-si-1976-number-1919-form-spain-individual
Then, you should be declaring this income in your annual tax return here in Spain (Declaracion De La Renta) and pay the relevant taxes, it’s advisable to find a good gestor to guide you.
A word of note here, unlike in the UK where your accountant/tax advisor is accountable for the advice they give you, here in Spain YOU are liable, even if the advice you are given is wrong. This stems back from Spanish culture, which you may remember when you learnt Spanish that they say in essence ‘The pen fell from my hand’ whereas in English we would say “Oops, I dropped the pen”.
Worked in Spain & the UK, Retiring here
In this scenario, as the UK is part of the EU, you should approach the local tax office in Spain and inform them of your situation. They in turn, would then contact the other countries you have worked in and where you paid tax and National Insurance contributions. This would then be paid to you by them directly as they collect from the relevant countries.
Different countries have different ages that they start paying your State pension from, so you need to bear that in mind.
Failure to correctly declare your pension income
What if you are or planning to be a resident here in Spain, but collect your UK state and private pension directly from the UK and do not declare here and in essence pay no taxes here? Surely, as the UK and Spain have a Double Tax Treaty (DDT, which means that you will not pay tax twice on any income you receive) as long as you are paying tax somewhere it’s not a problem? Well, consider that you are living in Spain as a resident, using their services, taking advantage of the healthcare and all the other things that make living here so enjoyable. Yet, you are paying UK taxes even though you are not living there. As you can see this doesn’t seem right! And it isn’t! Therefore, if you are found declaring your income incorrectly, it could result in you being fined, maybe even substantially. What is more, there is usually a minimal difference in the tax you might pay, whether it be in the UK or here, depending on your situation and income.
Also, give the fact that WILLS have now changed as of last August, meaning in essence you can choose which jurisdiction (country, laws) your estate would apply to, there seems little reason to risk this and not declare and pay your taxes as they should be. It would certainly stop a nasty knock at the door at some point down the road, especially as of next year when Common Reporting Standards come into rule (CRS – where countries around the world will be sharing information on the finances of their passport holders) meaning it’s even more likely you could be ‘found out’. Please note, this does not change where you are taxed for succession issues.
Therefore, we recommend making sure you are doing things properly, whether this involves you declaring this yourself or through a gestor, as well as making sure your WILL is up to date.
UK Pension Tax Changes 6th April 2016 (lifetime allowance)
By Chris Burke
This article is published on: 3rd March 2016
03.03.16
Anyone who has a private or company pension in the UK could be affected by the changes being brought in on the 6th April this year. This may be anyone with private pension(s) whose combined value is around £1,000,000, or a company pension scheme which would give an income in retirement of approximately £40,000 per annum.
In essence, the changes affect the tax you would pay on this money. Up until now, any pensions combined under £1,250,000 in real value would not be subject to any further taxes than those of normal income or inheritance tax. However, any pension with a value higher than this would be subject to additional taxes. This allowance is called a ‘Lifetime Allowance’ (LTA). The tax on pensions over this value can be up to 55%.
As from April this year, this Lifetime Allowance Value is being reduced to £1,000,000. Therefore, any pensions combined worth more than this would now be liable to these potentially additional taxes.
If you have a Corporate, Company, Final Salary or Defined Benefits Scheme this will also be tested against the new Lifetime Allowance. These Schemes are based on your final salary when leaving your employer as opposed to contributions and investment growth, and the amount usually has to be multiplied by a factor of 20 in order to calculate the capital equivalent value. These Schemes also usually pay a tax-free lump sum, and this also has to be included in the LTA calculation. Therefore, depending on the pension(s) this new limit may affect you.
What are the key factors involved in the Lifetime Allowance testing?
Retirement after age 55: Once a lump sum/income is taken from a Pension, these are tested against the LTA.
At age 75: Any Pensions that have not been accessed will be tested against the LTA at this time. Pensions in drawdown will also be tested again at this time.
Death pre-age 75: Pensions will be tested against the LTA to ensure that the limit has not been exceeded.
Transfer to a QROPS (Qualifying Recognised Overseas Pension Scheme – when you transfer your pension outside of the UK): If a UK Pension Scheme’s funds are transferred into a QROPS, the value of the transferred funds are tested against the LTA.
Of course, the main point here for many people is death before age 75. If this happens, as is stands your pension will be subject to this potential tax from £1,000,000 and above.
What are the tax charges?
If the Lifetime Allowance is exceeded, then the tax charges will depend on how the excess is paid from the Scheme.
If as a lump sum (normally the case in inheritance): subject to a 55% tax charge.
If as a Pension Income: subject to a 25% tax charge.
Transfer to a QROPS: subject to a 25% tax charge on the excess above the LTA.
Is there any protection against Lifetime Allowance charges available?
The UK Government has confirmed that from April 2016, the following two protection regimes will be available, allowing individuals a fixed or individual LTA dependent on the value of their Pensions and/or the type of protection:
Fixed protection 2016: This ‘fixes’ the LTA at the current £1.25m. In order for this to apply, no further Pension benefits can be accrued in a Scheme on or after 6 April 2016.
Individual protection 2016: The LTA will be set at the value of the Pension on 6 April 2016, when the new £1m LTA is introduced, so long as it is valued between £1m and £1.25m. This protection does allow further contributions, but any Pension in excess of the protected LTA will be taxed on the usual way when tested.
What about a transfer to a QROPS/Overseas pension scheme?
This currently enables an individual to safeguard their Pension Fund against this tax charge and allows the fund to carry on growing. As detailed above, the fund is tested against the individual’s Lifetime Allowance at the point of transfer, rather than at the point of each pension being tested as per above scenarios, i.e. death before pension accessed etc.
Perhaps the most important information to know regarding this, is that not so long ago the Lifetime Allowance for pensions was £1,800,000 in the UK. It is consistently reducing, which is worrying considering every twenty four years historically inflation doubles, and yet the Pension Lifetime Allowance is dramatically being reduced instead of increased, such as the tax bandings for income tax have been after years of lobbying by the general public. This could lead us to one main conclusion, the UK governments’ need to collect more and more taxes. Therefore, as the years pass by it could be this differential continues to grow and grow, in real terms meaning individuals will pay more and more tax.
The key points to consider with this are:
Having your pension(s) in the UK will enable them to be liable to the UK rules and the government’s ability to change them, including the uncertainty of what these changes may be in the future.
The Lifetime Allowance is consistently decreasing, meaning taxes are consistently increasing.
Understanding of these changes and how it might affect you could save you or your loved ones considerable money in potential taxes.
If you have no plans to retire in the UK and have pensions there, it could be worth having these evaluated to see whether it would be beneficial for you to transfer them securely outside of the UK.
Talking your personal circumstances through will put your mind at rest, or enlighten you on what your options are and how you can best plan for this eventuality.
If you would like to ask any questions regarding this subject, or speak to Christopher, a UK pensions expert who wrote this article, feel free to contact him on the details below.
