The last UK budget made significant changes to the rules for QROPS transfers and how they are taxed.
Pre-Brexit transfers to EU/EEA countries were exempt from the Overseas Transfer Charge (OTC) of 25%, which applied to all other countries. Following the implementation of the withdrawal agreement, we went through an uncertain period where unclear new regulations cast doubt on whether EU/EEA transfers would continue to be treated similarly. The new rules implied that QROPS transfers could only work if the individual lived in the country where the QROPS was based. The wording was ambiguous. However, QROPS transfers continued benefiting from the EU/EEA exemption.
Cross-border cooperation in the financial arena is a complicated situation. UK financial advisers and pension companies are restricted in the level of services they are allowed to provide to EU clients. Anything considered to be 'advice' is prohibited; only basic services can be accessed.
Many EU expats have been 'debanked' and forced to close their UK accounts; other issues such as pension companies' inability to provide annuities for new retirees have surfaced. Few saw that coming, but there is logic behind the new restrictions. Pre-Brexit, the UK were part of EU-wide agreements regarding cross-border actuarial activities, so each country enabled actuaries to source local mortality rates and calculate income payments accordingly.
The new reality for QROPS transfers
The Autumn budget clarified the situation regarding QROPS transfers to EU/EEA countries. Essentially, they will all be subject to the OTC unless the retiree lives in either Malta or Gibraltar. Both countries offer QROPS; if you live in one of them, the OTC exemption will still apply. It's worth noting that QROPS to QROPS transfers are still exempt from the Overseas Transfer Charge.
For example, if you live in Spain and transfer your UK pensions to a Malta QROPS, the 25% charges will be deducted. This has killed off the EU QROPS option for most people. Solutions are available for anyone looking to transfer their UK pensions into more suitable arrangements.
Lifetime Allowance rules
One of the advantages of QROPS transfers was that they weren't subject to UK Lifetime Allowance (LTA) rules. This meant that the pension fund could grow without the imposition of the LTA when benefits were accessed. This advantage was nullified after the abolition of the LTA, which made it less attractive to transfer to a QROPS.
Non-resident Self-Invested Personal Pensions (SIPPs) have become increasingly popular with expats as many of the restrictions associated with holding UK pension plans don't apply, including currency and investment choice. There are no problems with 'annuity only' contracts and no restrictions on accessing advice in the country where the individual resides. Non-resident SIPPs are generally more 'hi-tec' than traditional pension plans, offering fully automated systems and 24/7 online access.
We can add another advantage now that the LTA isn't an issue. Expats can transfer to a non-resident SIPP without concern about the LTA. It's important to note that the LTA was always a 'charge' rather than a 'tax'. Double tax treaties didn't apply, and the tax charge wasn't refundable.
The UK budget wasn't all bad news; the previous government's abolition of the LTA was already perceived to be under threat. The new government sent mixed messages about the possibility of the LTA being reintroduced with the smart money on a new version of the old rules. Thankfully, this didn't happen; pension savings are still free from LTA taxation.
Pensions & Inheritance Tax
There is more bad news for UK residents; pension plans will now be subject to inheritance tax (IHT). This was widely expected following a report by the Institute of Fiscal Studies, which highlighted the anomaly of pension plans being used as an IHT planning tool rather than for income generation.
This makes sense as the trade-off between tax relief on the input of contributions, and pensions then being taxable in drawdown, was being avoided by those wealthy enough not to need their pensions in retirement, preferring to reserve them for future generations
Another change in the budget referred to removing the antiquated 'domicile' system to one based on residence. Assets can't now be registered overseas or in trust to avoid IHT. This is not great for UK residents who had previously used legitimate financial planning structures to reduce tax bills. Tax will now be payable on worldwide assets for UK residents.
The details are still to be finalised, but this might be good news for expats. If someone isn't UK resident, their IHT position will be determined by the rules in the country in which they live. This may be advantageous, especially for those who reside in countries with generous IHT regimes. This appears to mean that IHT cannot be included in an individual's estate simply because it is situated in the UK, which might have been the case under the old domicile rules.
In conclusion, abolishing the LTA and the new residency regime will greatly benefit expats. Local financial and tax advice should always be sought either way; it's important to note that the pensions industry, much like any other area of our technology-driven lives, moves on. It's always a good time to review our options and retirement strategy!
If you would like to find out more about changes to the rules for QROPS transfers, please complete the form below.
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