The relationship between Brexit and pensions is not quite ‘top of the agenda’ in EU / UK discussions. We appear to be still in the early Brexit phase, where more questions than answers are being put forward. Even so, it is important to be prepared for a range of outcomes to avoid any unpleasant surprises when ‘B day’ eventually arrives.
The official date for the UK to leave the EU is the 29th of March 2019. However, negotiations will need to be concluded by October 2018 as this is the key date when the European Commission is due to meet to discuss and vote on the final deal. Although it may seem a long way away, the clock is ticking for the negotiators. It does look like there will be a transition period of up to two years post-Brexit day; exact details are yet to be finalised.
Today’s headline-grabbing issues include:
- What sort of trade and customs agreement will the UK have with the EU?
- The extent of the European Court of Justice’s powers and to which issues.
- The Irish border question.
- The rights of EU citizens in the UK and UK citizens in EU countries.
- How will Sterling fare in a post-Brexit environment?
- What about reciprocal medical cover agreements?
- Will residency requirements change, and if so, how?
There is a myriad of other issues that have to be resolved before the UK can claim that it has completely left the EU. At the moment, the answer to most of the above is: ‘don’t know yet’!
Brexit and Pensions: The Overseas Transfer Charge
Although nothing has been discussed specifically about pensions, there will inevitably be repercussions. This may come in the form of legislative change or simply due to other events having a knock-on effect.
On 9th March 2017, the much-criticised Overseas Transfer Charge (OTC) came into force. Essentially trustees of pension schemes were obliged to pay a charge of 25% on total funds transferred overseas in certain circumstances. This new tax had a significant impact on the Qualifying Recognised Overseas Pension Scheme (QROPS) sector. There are exceptions, one being that if the transfer is to a European Economic Area (EEA) country, the charge would not be applied.
It is important to note the wording of the legislation, which states that: “the member is resident in a country within the EEA and the QROPS is established in a country within the EEA”. Therefore, as things stand, it does not matter whether the UK is in the EEA or not, although this might change post-Brexit if the UK does in fact leave the EEA. Let’s not forget that the OTC will also be levied if an individual subsequently moves outside of the EEA within 5 full UK tax years of the original transfer.
Anyone planning a transfer to a QROPS should consider doing so before the UK exits the EU. The transition period might allow a little more time; however, if the UK leaves the EEA, the situation could change rapidly. As always, it is essential to take professional advice on this matter.
Brexit and pensions: currency issues for expats
Currency risk will be of concern for British expats in the EU. A bad Brexit for UK Plc would inevitably put pressure on Sterling. Markets dislike uncertainty; if UK companies decide to relocate to other European countries to ensure on-going access to the EU internal market, the consequences could be significant.
The UK government’s own figures make grim reading when forecasting future growth potential. Current estimates of a negative effect on Gross Domestic Product (GDP) range from 2% p.a. in the best-case scenario to 8% in the worst. Should this happen and Sterling devalues, expat pensions will be affected proportionately. It, therefore, makes sense to reconsider Sterling invested pension plans and either create a natural hedge by spreading currency risk or taking risk out of the equation completely by switching to a Euro-based QROPS or International SIPP.
Tax planning issues
Tax planning will be an important factor when it comes to Brexit and pensions. Tax legislation may well change radically post Brexit in both the UK and other EU countries. What may have been a sound tax strategy whilst the UK was a member of the EU might well become less effective afterward. Particular attention needs to be focussed on wealth, capital gains, and inheritance/succession tax. Now is therefore a good time to look at current and potential future liabilities and plan accordingly.
Tax planning is a highly individualised exercise; no two people’s situation is the same. Attention needs to be paid to any death benefits that may apply to your pension, who will inherit, and how that would affect their tax position.
Taking time to review your financial planning strategy is always a good idea. In a world where there are so many unknowns, making contingency plans and considering ‘what if’ scenarios will equip you with essential knowledge and the ability to change track when necessary.