If clients have chosen to retire in Europe or are thinking of doing so, steps should be taken now to review their pension options before Brexit potentially changes the rules, says Jason Porter of specialist expatriate advisers Blevins Franks.
With still no certainty on the timing and form of Brexit - be it hard, soft, no-deal or even no Brexit at all - it is difficult for expatriates to plan accordingly. Financial advisers are often asked, for instance, what will happen to UK pension rules for expatriates after Brexit, but the reality is that no-one, not even the UK government, knows for sure.
However, when it comes to rules for expatriate pension transfers, it is likely that things may change. So if you have clients that are already retired or planning to retire abroad, take steps now to review their pension options under current rules.
Transferring to a QROPS can consolidate several UK pensions into one single tax-efficient vehicle and unlock other benefits."
The rise of QROPS
Many expatriates have chosen to transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Since QROPS' introduction in 2006, over £11.4bn was sent through 128,100 transfers up to April 2019 - £640m in the past year alone.
"Transferring to a QROPS can consolidate several UK pensions into one single tax-efficient vehicle and unlock other benefits," said Jason Porter, director of specialist expatriate financial planning firm Blevins Franks.
"Funds are sheltered from UK taxation on income and gains, and immune to future changes to pension rules.
"Usually, a QROPS provides greater investment diversification compared to UK pension schemes and more freedom to vary income. Many also offer multi-currency flexibility, letting a client hold and draw funds in their currency of choice. Meanwhile, as UK pension payments are usually made in sterling, the income remains sensitive to volatile exchange rates during these uncertain times. And, while most UK pensions are payable only to a spouse on death, a QROPS allows other heirs to be included in estate planning."
Taxation of QROPS transfers
Currently, most expatriates in the EU can transfer to a QROPS completely tax-free, but there are two key situations in which tax is payable.
"First, if their combined UK pension benefits exceed the UK's lifetime allowance - currently £1.055m - they would face a 25% tax penalty on any transfer over this limit, even if they are non-UK resident," says Porter. "Once in a QROPS, their funds would never be subject to lifetime allowance charges - or indeed any UK taxes - again.
"The second taxable scenario is if you transfer your client to a QROPS based outside the EU/EEA (European Economic Area). In this case (unless they live in the same jurisdiction as the QROPS), the UK would apply a 25% ‘overseas tax charge' on the whole amount transferred.
"UK expatriates in the EU can escape this tax by transferring to a QROPS based in an EEA area, such as Malta. However, a UK government might introduce the 25% ‘overseas tax charge' on EU transfers after Brexit."
A closing tax-free window?
As Brexit eliminates Britain's current EU commitments - including freedom of movement for capital - the Treasury gains more scope to recoup revenue on the income and assets of UK nationals abroad. Many speculate this will prompt the UK government to impose widespread penalties on pension transfers, even within the EU.
The UK government has offered reassurance that expatriates will keep the right to make overseas transfers, whatever happens with Brexit - but has stopped short of making any tax promises. Last year, economic secretary to the Treasury, John Glen, confirmed that tax-free exemptions would be "dependent upon the terms of future exit agreement between the UK Government and the EU".
What to consider
"Without a guarantee that tax-free transfers will continue, it is sensible for anyone considering transferring to act sooner rather than later," says Porter. "Timing is especially important here as the administrative process for pension transfers can take several months to complete.
"However, it cannot be overemphasised that transferring is not appropriate for everyone. Also, not all QROPS are the same - there are differences between providers and jurisdictions that can affect the benefits. Alternative investment structures could offer expatriates comparable benefits to QROPS in their country of residence."