British expatriates could face a Brexit QROPS dilemma in the coming months. We are unlikely to know the full impact of Brexit on QROPS for at least another year, perhaps even longer. However, it is very important to consider what could happen and how the expatriate community might be affected.
In our view, anyone who is considering a move abroad in the next year, or who is already resident outside the UK with UK pensions, should start making plans now.
Brexit QROPS fallout
Predictions of a post-Brexit UK tend to vary from disastrous economic conditions to sunlit uplands. In any case, Brexit QROPS issues could manifest themselves in a number of ways.
In the first instance, there is the question of currency risk. If you have a UK pension and are retired or live in an EU country, you will be exposed to exchange rate fluctuations. As a rule of thumb, pensions are designed to ensure an income is provided for life after retirement. Whether in a defined benefit, safeguarded scheme or a defined contribution plan where benefits are not guaranteed, the value of Sterling against the Euro will mean that actual spendable income will vary from month to month. These variations may work in your favour periodically. However, relying on this to happen continuously is an unrealistic expectation as exchange rates are fluid.
Ask yourself what a devaluation in Sterling would mean to your personal cash-flow planning. A 5% drop, for example, might not make a great deal of difference, particularly if you are in the fortunate position of spending less every month than you earn. But, what about a 20% drop? Sterling actually fell by this amount in the immediate period after the referendum vote in June 2016.
Death benefit risk
Under current legislation, death benefits paid as lump sums to beneficiaries where the pension-holder is under the age of 75 on his/her demise are tax free. The situation for the over 75’s is very different. An unreclaimable tax of 45% could be levied on the lump sum death benefit. In certain circumstances, this can be avoided or mitigated. However, when we consider that most people now live to 75 and beyond, this presents a real risk for the unprepared.
Successive UK governments have had a habit recently of changing pension legislation without, it seems, too much thought for the differing circumstances of non-standard people. The same rules apply to a married couple with 2 children who rely almost entirely on one pension scheme, as a single person with no dependents and numerous sources of retirement income.
Some might argue that the government and regulators approach is too conservative and almost eliminates an individual’s ability to make and be responsible for their own decisions. The obligation for defined benefit to defined contributions transfers in excess of £30,000 to only be allowed after the individual pays for expensive (and sometimes irrelevant) independent advice is a good example. There appears to be no room for nuance or consideration of the many factors, financial or non-financial, which might be the real reasons for someone wanting to transfer. Similarly, the Overseas Transfer Charge (OTC), which came completely out of the blue in 2016, has placed anyone outside exempt positions with the possibility of a 25% charge (tax) on transfer to an overseas scheme.
Another legislative risk is a change to the Lifetime Allowance. This is the amount of total pension savings one can hold before a tax of either 25% or 55% will be levied on the excess. The LTA has gradually been whittled away from a high in 2010/11 of £1.8m to the £1m it is today. For anyone either near or over this level, serious consideration should be given to addressing this potential problem. There are indeed ways to mitigate any tax liability, but they have their limitations.
Solutions to the Brexit QROPS issues
In a post-Brexit UK any of the above risks could affect those who either left the country many years ago, have recently moved or are about to move. For every problem, there is usually either a complete solution or a way by which liabilities and structural issues can be solved. Much will depend on how the UK fares in the post-Brexit economic environment. Pensions seem to be considered low hanging fruit for governments seeking to raise revenue without creating bad headlines the day after the budget. Subtle changes which could create major problems for the unprepared are easy to put in place.
A transfer to a QROPS could well be the answer to a number of the issues highlighted above. After transferring you will be able to:
- Change the currency of your pension to your currency of reference
- Take control of death benefit risk
- Be outside UK legislation
- Control and, in most cases, eliminate lifetime allowance risk
Forewarned is forearmed, so do take time to evaluate your personal situation as soon as possible. Post-Brexit day might be too late.