British expats in the UAE have got it easy compared to their counterparts in Europe – that’s the verdict this week after the British press revealed this week that UK pensioners living in other EU states risk losing their personal pension payouts unless a deal is struck in the Brexit negotiations.
Treasury committee member Nicky Morgan has warned of dire consequences to British expat pensioners in a letter to Britain’s chancellor, Philip Hammond.
This threat to Brit expats in Europe is the latest in a series of Brexit worries; as Europe’s second largest economy prepares to strike out on its own.
What’s the Brexit pension issue for Brit expats in Europe?
The issue here is insurance.
Personal pensions are often sold through life insurance companies. The pension structures themselves are typically an underlying insurance policy that allows users to get a return on the premiums regularly invested through an investment platform. UK personal pensions arranged like this can pay out to UK citizens resident in the European Economic Area through a general ‘passporting’ legislation that allows the reasonable freedom of capital around EU states. When Britain exits the EU, an alternative agreement will need to be struck regarding insurance-based provisions.
The Association of British Insurers highlighted this potential danger in June. UK Treasury Committee member Nicky Morgan also flagged that mainland Europe pensions will potentially have drawdown payments into Britain stopped for the same reason – unless a deal is struck.
How likely is a pension deal to help Brit expats in Europe?
The Telegraph quoted an optimistic Hargreaves Lansdown, who said an agreement shouldn’t be too difficult. But, as you may have seen in recent news, it can all get a bit tit-for-tat in the overall Brexit negotiations. Anything can be held hostage in the discussions as the politicians thrash out terms on subjects as varied as immigration. So the situation is still up in the air.
So, what do British expats need to do?
Whether you are an expat in Europe or elsewhere, this Brexit pensions threat is all the incentive you need to check your own pension arrangements are safe – especially if mainland Europe is a possible retirement destination for you.
You have the right to get valuations on your contributions made to company pensions from the end pension provider. Your financial adviser can make a formal request for this of your former company on your behalf. For defined benefit (DB) schemes, you are entitled to one free valuation a year – more frequently than that you pay around £200, since the provider of the scheme needs to crunch the numbers to calculate it in cash terms.
With non-DB personal pensions, it is far easier to get a snapshot of what you have now.
If you have a range of UK company and personal pensions, it’s often hard to get a grasp on how much in total you have to live on in retirement. Not all company pensions pay out at 65 years old, for example, so you will start receiving benefits from different sources at different times. Not too efficient. That’s the confusion that the UK Government’s pension dashboard for every UK citizen has been specifically designed to address when it is rolled out in 2019 – but the pensions dashboard is about getting information together in one place. What can have far more tangible benefits is consolidating the actual pension contributions in one consolidated financial package. This can take a bit of work to arrange, but offers enduring benefits:
- Instead of paying tax on draw-down from each pension source, the tax position can be centralized and streamlined.
- There can be one investment portfolio for the gathered-together funds, rather than different portfolios for different pensions.
- Allowable draw-down from these pooled pensions means more money coming in more efficiently – good if you want to pay off a chunk of the mortgage or gift the cash to a relative.
Offshore pooled pension contributions such as Qualified Recognised Overseas Pension Schemes (QROPS) can be domiciled in different jurisdictions around the world, often improving the tax position if in a low-tax location. This is a tightly regulated affair, of course: Her Majesty’s Revenue & Customs – the tax arm of the Treasury – only allows transfers to destinations and pension providers which it deems solid and transparent.
Hasn’t the UK Government slapped a 25% tax on transfers into QROPS in this year’s Budget?
Yes. This tax is relevant when the pension owner is, for example, living in the Middle East, or Australia, or any other non-European destination.
As per the March 2017 policy paper on the subject, if the owner and the domicile of the QROPS are within the European Economic Area (EEA), the tax isn’t applied.
So the QROPS holder could be sunning themselves in France or Spain, while the QROPS could be domiciled in Malta – both EEA.
However, these rules could change again in a year or two depending on the result of these Brexit negotiations, since a QROPS in the above example will be a transfer from the UK into Europe. So there’s an argument that if you were thinking about consolidating your pensions – whether into a UK based or an offshore structure – it’s worth doing so sooner rather than down the line.
Although this Brexit pensions rumpus may only affect UK expats in Europe (and not elsewhere), here at Holborn Assets we intend to keep a close eye on this issue and all other Brexit-related pensions issues. And we suggest you do the same. Ask your IFA for advice, and don’t be scared to spread your net when it comes to the information at your fingertips. The more trusted advice you can get, the better-placed you will be to safeguard your pension.