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.
Recent developments
In many ways, little has changed in the last 12 months regarding Brexit and its’ potential impact on international pension transfers and QROPS. There is, however, an unavoidable issue that makes the situation much more pressing for anyone who is considering a move abroad in the next year or who is already resident outside Britain with UK pensions; time is marching on!
We are now only days away from leaving the EU, and the EU/UK are still no closer to completing the withdrawal agreement.
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 many ways.
Currency risk
For expats, the biggest threat is a ‘no deal’ scenario. Stock and currency markets would become even more volatile than we’ve recently witnessed, as uncertainty would create wild swings in both company valuations and the global economy.
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.
The exchange rate against the Euro has fluctuated over the last year between £1:€1.10-1.17. It is envisaged that a ‘no deal’ would leave Sterling highly vulnerable on the international currency exchanges. When the withdrawal agreement veers towards the harder side, Sterling tends to drop, and vice-versa.
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.
Expatriates who rely on a Sterling pension or salary would be wise to prepare for a drop in income. Those who are currently thinking about transferring within the EU should seriously consider starting the process as soon as possible.
Death benefit risk
Under current legislation, death benefits paid as lump sums to beneficiaries where the pension-holder is under 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.
Legislative risk
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 above £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.
Lifetime Allowance
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 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.
The Overseas Transfer Charge
The government introduced the Overseas Transfer Charge (OTC) of a 25% tax on the transfer of UK pensions to an overseas scheme in 2016. In general, residents of Europe/European Economic Economic (EEA) countries were exempt from this charge.
In the case of a ‘no deal’ scenario, the UK may elect to leave the EEA. If this happens, all transfers to other EEA countries could be subject to the OTC charge.
Possible outcomes to Brexit negotiations
There are, of course, other possible outcomes. As and when the withdrawal agreement does pass through parliament, the UK will enter a transitional period of up to 21 months. In this case, essentially nothing would change until the end of 2020. The pressure would then be on to complete the new trade deal with the EU. This would give people a little more breathing space to plan their future.
Another idea being mooted is suspending Article 50. Again, more time would be available for the politicians to arrive at a solid agreement. Individuals would have more time to consider their options with regards to becoming resident in another EU country and what to do with their pensions and investments. It is now clear that UK nationals who move to an EU country will have to become fully tax resident there. Failing to do this could affect access to health services and create problems with the tax authorities.
Solutions to the Brexit QROPS issues
In a post-Brexit UK, any of the above risks could affect those who 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.
With so much currently unknown, it is important to construct your financial planning in a flexible way to cope with a variety of situations. The first step is to contact an experienced and qualified financial adviser, who will invariably offer a free initial consultation to run through your circumstances. Your adviser will be able to recommend a way forward, which will give you some level of certainty in very uncertain times.