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Protect your pensions and retirement savings for the long-term
by Stephen Rankine, Private Client Manager, Blevins Franks
Our pensions are often key for our long-term financial security, but unfortunately for British retired expatriates, UK pensions are complex. Deciding what to do with yours involves navigating various options, establishing how they suit your objectives, researching the tax implications and weighing up the pros and cons.
UK pension and tax regulations change regularly, often impacting British expatriates, and foreign tax regimes are rarely straightforward. You need to keep up to date on reforms in both countries so you can review your retirement planning as necessary and make informed decisions.
Lasting a lifetime, the longevity factor.
How long will you live? And your spouse? Without a crystal ball this is an unknown factor in financial planning, but an essential one nonetheless because you need your money to last as long as you do. The average life expectancy for a male aged 65 today is 85, with a 25% chance of living to 92. For a 65-year old female the average life expectancy is 87, with a one in four chance of reaching 94. Our hope is that we live longer than average and should therefore plan for living to a ripe old age.
When you consider that often it is necessary for the wealth of a deceased spouse to pass to their surviving partner for them to continue having sufficient money to live on, the need for a financial planning road map is very important.
Studies show that many people, including affluent households, often overestimate how long retirement savings will last. While you may always be able to afford basic living necessities, your later retirement lifestyle could fall well below your expectations. This could, for example, affect the level of care you can afford if needed in your later years, an important consideration if you live in a different country to your family.
Much depends on the type of pension you have. A pension providing a secure income for life can provide peace of mind. Other options provide the opportunity for your funds to grow, but you need to carefully manage investment risk and the rate of withdrawal from the pension fund to meet your income needs.
The inflation, income and investment factors.
Recent inflation levels and rising prices have reminded us about how much inflation can impact our spending power. While we cannot predict inflation rates in our future years, even low levels reduce the value of savings and income over the long-term. It is essential to plan ahead for it, for both our pensions and investment capital.
The last couple of years have not been kind to retirees, with the rising cost of living and the possibility of investment portfolios being lower too. In this environment people may be tempted to draw higher amounts from their pension fund.
When this is combined with longevity, the impact of spending too much in the short term (especially when portfolio returns are lower than average) can affect the long-term value of your funds and the ability to meet future income requirements. This in turn can cause a dilemma for retirees who need to meet today’s needs while protecting their future needs as well.
With a sensible portfolio and drawdown plan, this can be effectively managed. The key is to understand your financial needs – the amount required to cover basic living costs, for both day-to-day costs such as shopping, meals outs and fuel, and one-off expenses such as holidays or a new car. Then review and adjust your plan to cater for the year-to-year increases in the cost of living and portfolio performance over time.
The tax factor.
When weighing up the options for drawing your UK pension as an expatriate it is important to take the tax implications in your country of residence into consideration.
If you are resident in Madeira, most UK pension income is subject to Portuguese taxation, including lump sums.
The key exemption is income from government service pensions, which remains liable to UK income tax. Non-residents currently continue to benefit from the UK £12,570 personal allowance (assuming they do not receive ‘disregarded income’ treatment).
The UK’s 2023 budget abolished the pensions lifetime allowance and resulting 25%/55% tax charges. However, under draft legislation, with effect from 6th April 2024 three new allowances – the ‘lump sum allowance’ and ‘lump sum death benefits allowance’ and ‘overseas transfer allowance’ – will come into effect. This will limit how much can be taken as a tax-free lump sum, by yourself or your beneficiaries. In any case, the Labour Party has said it plans to reinstate the lifetime allowance if it is elected to government.
The advice factor.
Pensions are very personal and so establish a solution that works for your circumstances, needs and objectives.
Since they are so complex and making a wrong decision could impact your retirement security, you really do need to take professional, regulated advice. In any case, the UK rules require this for certain pension transfers.
The problem for UK nationals living Madeira is that most UK advisers are not regulated to give advice to EU residents – they lost their ‘passporting’ rights with Brexit. Unless they have taken steps to be correctly regulated here, they should not be advising you.
Even without this issue, it’s important to get local advice here in Madeira. Most UK-based advisers do not have an in-depth understanding of Portuguese taxation, which can result in you paying much more tax than you need to.
Find a qualified advisory firm like Blevins Franks which is regulated to provide advice on UK pensions in Portugal and which has the specialist cross-border advice you need – a thorough knowledge of UK pension regulations and of both UK and Portuguese taxation and the interaction between them.
The 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; an individual should take 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.
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