It is unclear what will happen to QROPS and the Overseas Transfer Charge when the Brexit transition period ends on 31 December 2020. By then, we should be completely clear about the UK/EU relationship’s future and fully prepared for the ‘new normal’. Unfortunately, it appears that nothing could be further from the truth as both sides accuse the other of being unreasonable, and previously agreed protocols are thrown on the bonfire.
Negotiations are being held in secret, and little information is leaking out regarding the current position on many issues, including financial services.
The UK economy is heavily reliant on financial services. This sector makes a considerable contribution to GDP year on year. Almost 50% of London’s economy is dependent on financial services alone. EU Freedom of Movement and Services has underpinned the industry for many years and accounts for 43% of the UK’s exported financial services and £29bn in tax receipts.
Understandably, the financial industry is nervously awaiting the final UK/EU deal results, hoping for the best, but fearing the worst. The main issue is Passporting of services. When the UK was a member of the EU, it was easy for a UK company to provide products and services to the rest of the EU without setting up a physical branch office in the countries in which they worked unless they wanted to. Even then, Freedom of Establishment rules made this process quick, straightforward, and simple to follow.
QROPS and the Overseas Transfer Charge exemption
Several financial planning issues need to be addressed for those who are planning to retire or live and work in an EU country. UK based investment funds may no longer be available, bank accounts may have to be closed, pension providers might make it difficult to access benefits, and transfers to EU pensions could become prohibitively costly.
The UK government introduced the Overseas Transfer Charge in 2017. All overseas transfers, such as to QROPS, then became subject to a tax of 25%, unless they qualified for one of the three exemptions below.
- A transfer to an EU/EEA country
- A transfer to an Occupational Scheme
- A transfer to a scheme based in the country the individual resides
We don’t know whether these exemptions will still apply post-Brexit. However, the industry is rife with speculation.
What we do know is that a transfer that is completed before the end of 2020 will qualify, so anyone wishing to move their pension to a QROPS and avoid the Overseas Transfer Charge should begin the process as quickly as possible. It may well be that the exemption will remain post-Brexit, but this assumes an amicable agreement regarding the ‘passporting’ of financial services. Right now, that seems a remote possibility.
The situation for individuals who are considering transferring a Defined Benefit (final salary) scheme is even more prescient. DB transfers are strictly regulated, and the process is highly complex and time-consuming. Rightly so too. DB pensions provide a guaranteed income for life, which is indexed according to the individual scheme rules. Careful consideration regarding the relative benefits of transferring to a non-guaranteed scheme is vital.
UK and EU negotiators have a lot on their plates in the coming months. The UK had to formally adopt all EU legislation before being able to change any of it. So, the UK will start with the full package and then remove the bits they don’t like.
It’s unlikely that pensions legislation will be at the top of the list, and there will be forceful lobbying from within the industry where changes will damage businesses.
If the worst does happen, there may be other ways for UK pension-holders to avoid the Overseas Transfer Charge. There are two other exemptions, of course, and the ‘Occupational Scheme’ route may well form part of the solution post-Brexit.
In conclusion, QROPS transfers could well be a casualty of the Brexit trade negotiations. Anyone thinking about transferring is advised to take action as soon as possible. Otherwise, the benefits of an expanded range of investment options, currency flexibility, and the ability to avoid the Lifetime Allowance charge will be lost, perhaps forever.