By Matthew Krystman, Partner, Blevins Franks
Pensions is a topic dear to all our hearts. It represents a lifetime of professional effort, but also the rewards should be the fulfilment of that hard work to see us comfortably through our retirement years, whether in Portugal or UK, when most of us want to enjoy ourselves without counting the pennies or cents.
But it can be complicated, can’t it?
This article briefly clarifies five key things you need to be aware of before deciding what do with your pensions.
- UK State Pension – what do you need to be aware of?
To qualify for the full UK state pension, currently £9,628 a year, you must have paid UK national insurance contributions for 35 years. Otherwise, provided you contributed for at least 10 years, the amount you receive is based pro-rata on how much of 35 years you secured.
If have already paid your 35 years of national insurance and are still working, you continue to pay contributions. It is possible to make voluntary contributions to buy back six years if you haven’t reached the minimum 10 years.
You can obtain a UK State Pension forecast online at www.gov.uk/check-state-pension, or download form BR19 and post it to the Department for Works & Pensions.
UK nationals who are resident in the EU continue to receive the UK state pension. It’s paid gross and taxed in your country of residence, rather than in the UK.
- ‘Defined Benefit’ pensions and ‘Defined Contribution’ pensions – what’s the difference?
People who worked for UK companies long term often have traditional company pensions called ‘defined benefits’ or ‘final salary’ (they’re the same thing), where the accrual of benefits is based on the number of years you worked for the company and your final salary.
These schemes are becoming more of a rarity because they created a massive ongoing liability for the company, sometimes leading to a ‘black hole’ on their balance sheets, particularly with people living longer than originally forecast.
These days employers often favour ‘defined contribution’ or ‘money purchase’ pensions, where the financial commitment is quantifiable.
Individuals have used these ‘personal pensions’ for years. The UK government encourages people to save for their retirement by offering tax relief on pension contributions – money accumulating within the pension grows tax free. They can help people create valuable pension pots, through the tax advantages, enforcing a savings culture and not being able to get your hands on your money until at least 55.
Generally, if you are resident abroad, and have applied for and received an NT tax code, your personal pensions are liable to local income tax in your country of residence, instead of UK tax (only government service pensions are taxed in the UK). This is the case with Portugal.
- What is the ‘lifetime allowance’?
In simple terms, the lifetime allowance is the maximum combined amount you can accumulate in UK pensions (excluding state pensions).
Introduced in 2006 with a £1.5million threshold, it gradually increased to £1.8million before being slashed to £1 million by 2016. It then increased with inflation to £1,073,100, but the 2022 UK budget froze it for the next five years.
Any amount above the lifetime allowance is subject to a one-off tax charge of 25% if the excess is paid as a pension or the pension fund is transferred abroad, jumping to 55% if paid as a lump sum – it can be a combination of both.
It is not limited to UK residents, so continues to affect us in Portugal.
- What benefits do QROPS bring?
A Qualifying Recognised Overseas Pension Scheme is an overseas pension created to receive monies from UK pensions when the owner has moved abroad. To be able to receive the monies from a UK pension, the QROPS must be recognised by HM Revenue & Customs, so there is some degree of comfort in that fact alone.
One popular reason many expatriates transfer UK pensions to QROPS is to avoid further lifetime allowance charges. Once in a QROPS, your pension can safely accrue and appreciate in value without running the risk of the 25% or 55% tax charge.
Many expatriates decide that since they have left the UK, why leave a major asset behind, completely at the mercy of the UK taxman? Remember, prior to 2006 you could save whatever amount you wanted in your pension without a tax penalty. And the £3 trillion in UK private pensions could be a massive tax target for any future chancellor or government.
Another reason for transferring is currency. UK pensions are paid in Sterling, which is not helpful if most of your expenses are in Euros.
More recently, another big driver is that UK financial advisers and pension firms can no longer, post-Brexit, offer European residents advice or guidance – and pensions are so complex, with so much at stake, professional advice really is necessary here.
- What about the ‘overseas transfer charge’?
The 25% overseas transfer charge was introduced in 2017 to deter people from transferring their pensions out of the UK.
Importantly, currently not all QROPS transfers are subject to the overseas transfer charge. If you live in the EU and transfer to an EU QROPS, the charge won’t be applied. But if you move outside the EU within five UK tax years of making transfer, it will be applied retrospectively.
What does the post-Brexit future hold?
The best news must be that the UK will continue to uplift UK state pensions, and continue to honour the S1 system for those receiving UK state pensions.
However rules can change, and now the UK is outside the EU/EEA it could very easily extend the overseas transfer charge to EU residents.
It could decide to change the rules completely, renegotiate the double tax treaty, and tax all UK arising income in the UK, as UK rental income and government pensions already are.
From the Treasury’s perspective, one attractive option would be to remove personal allowances for non-UK residents. We won’t pay twice because of the double tax treaty, but we could easily end up paying more than we need to.
The bottom line is that pensions can be complex with pitfalls not immediately visible and an area to seek expert advice on. We all like doing a little bit of DIY from time to time, but not if it could adversely affect our hard-earned wealth.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
You can find other financial advisory articles by visiting our website here