Just when we thought that electioneering was the favourite pastime of politicians on mainland Europe, up pops Theresa May with her shock announcement of a UK general election to be held in June. Should we be concerned about changes to pension legislation?
The answer is probably yes. If the Tories win as predicted, I expect them to continue in a similar vein of not consulting the pensions industry when tampering with regulation. Who knows what might happen next? The Overseas Transfer Charge on pensions was indeed a surprise. The considered opinion is that the UK Exchequer will raise only a limited amount of funds via the tax.
There was more uncertainty last week as HMRC’s QROPS list was suspended to take account of changes. We are expecting a further suspension of the list come June.
Gibraltar pension legislation and the 70/30 rule
Gibraltar unexpectedly didn’t change its QROPS legislation and is retaining the 70/30 rule. The 70/30 rule, whereby at least 70% of a pension pot must be used to provide a lifetime retirement income, has become redundant for anyone with a Malta QROPS now that full flexi-access to UK pensions is permitted. Gibraltar may yet regret not falling in line with UK legislation. This may eventually result in schemes based there being removed from the list.
The taxation of pensions in Europe
Different EU countries have different ways of taxing lump sum withdrawals, making it more or less attractive as an option. Spain uses a complicated formula based on how much of your total pension value is funded with personal contributions. Meanwhile, French pension legislation levies a 7.5% tax on Pension Commencement Lump Sums. For those lucky enough to benefit from the 10-year income tax exemption in Portugal, simply drawing down income is as tax efficient as it can be.
Political party positioning
Battle lines are being drawn between the main political parties in the UK. Labour have now announced their Brexit plan. They are seeking as close a relationship as possible with the EU single market. They have promised that there will be no change for those EU citizens currently living and working in the UK. This is in marked contrast to the Tories who have been reluctant to take such a step without reciprocation from the EU27. The state pension triple lock is another area where Labour differs from the Tories. The triple lock guarantees that state pensions will rise every year by the greater of either 2.5%, average wage increases, or inflation. Mrs. May and the Chancellor, Philip Hammond, were pressed on maintaining the status quo post-election and were reluctant to commit. Jeremy Corbyn notably did so; this may be a factor when voters go to the polls.
Membership of the European Economic Area
Neither party has clearly set out policy regarding the UK’s membership of the European Economic Area (EEA) post-Brexit. Labour has stipulated that if they win, membership would be implicit in terms of their single market and customs union policy. We have yet to hear from the Conservatives on the matter. We would however expect the CBI to use their influence and push the party for continued membership.
Not being a member of the EEA may pose a problem for those seeking to transfer their pensions to a QROPS. Non-membership may mean that future transfers would attract the Overseas Transfer Charge on pensions. Thankfully there are always solutions available.
At present, the Lifetime Allowance charge imposed on pension pots worth £1m+ might attract a new Chancellor’s attention and be further reduced. Care must therefore be taken at the outset when thinking about a transfer. It is important to consider the most appropriate jurisdiction and structure when choosing a QROPS. As legislation may change in the future, it is also important to select a QROPS provider that offers a free transfer from one territory to another.
In summary, we appear to be moving into an era where surprises are to be expected. Keep abreast of pension legislation changes when they come along and be certain you and your adviser have everything set up in the best possible way. Be prepared to react if necessary!