Don’t let Brexit spoil your retirement

If you are a UK citizen living in the Eurozone the whole Brexit situation is very unsettling.  One area of particular concern is pension income – if you have a company or private pension in the UK then there are several issues that you urgently need to consider over the coming months.

The overseas pension transfer option – use it or lose it?

If you have a company or private pension in the UK, but live abroad, it can be advantageous to transfer your funds overseas. At present you are free to do this under the current EU legislation if your pension is not already in drawdown – but Brexit may mean you lose this opportunity.

Rewind to 6th of April 2006.  A single pension tax regime was introduced in the UK which replaced the previous eight regimes. This specific day is referred to as A-Day and this regime, which is still in place today, is known as ‘pension simplification’. One of the main aspects of pension simplification was the introduction of ‘Qualifying Recognised Overseas Pension Schemes’, more commonly referred to as QROPS.

Why was QROPS introduced?  Because the UK was obliged to comply with EU Directives relating to the ‘free movement of capital’.  Prior to A-Day, if you had built up a personal or occupational pension in the UK, and then moved away, you could only transfer your pension to your new country of residence.  However, since the introduction of pension simplification and QROPS, it is now possible to transfer to a wide number of different jurisdictions.  Why is this important?  Because it gives you greater choice – you can relocate the funds to the most tax friendly and cost-efficient regime that best suits your individual circumstances.

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However, now that Article 50 has been triggered, a point may come where the UK is no longer subject to EU regulations.  It’s quite possible that, when this happens, HMRC will take the opportunity to withdraw or restrict your right to transfer your pension to a more attractive overseas jurisdiction.

Sorry.  Your money stays here

This will be very unfair, and disadvantageous, to all those who hold private, company and personal pensions in the UK, yet live in Euroland.  But look at it from the taxman’s perspective.  Move your pot overseas and you’ll be depriving the UK government of future tax revenue – so they have a big incentive to remove this right.  Unfair or not it’s highly likely that they will find this opportunity to too tempting to resist.  In fact, they’ve already taken large strides in this direction by blocking members of civil service pension schemes from transferring their funds elsewhere.

Company pension schemes in difficulties

What’s more, the government are not the only ones with a strong vested interest in restricting the free movement of your funds.  If you are part of a company scheme they are also likely to make any transfers increasingly difficult.  That’s because many of the UK’s top 350 companies’ pension schemes are already hugely in deficit – so they are discouraging any further capital outflows.

The deficit is the gap between the expected liabilities of pension commitments and the funds that companies hold to pay for pensions. While many companies have set aside billions in recent years, rising life expectancy, combined with lower expectations for returns on investment, has put more pressure on pension schemes and seen the deficit grow.

How big is the current problem?  The combined pension deficit of FTSE 350 companies has risen to £62bn, accounting for 70% of their profits. The deficit as a proportion of profits recorded for 2016 is higher than at any time since the financial crisis, following a £12bn rise since 2015. The 25% increase came in a second year of comparatively low profit for UK publicly listed companies.

The total deficit of all the defined benefit (DB) pension funds in the UK stood at £460bn at the end of August 2017, an increase of £40bn since last month, according to figures released from PWC.  PWC’s Skyval index, which comprises data from 5,800 UK DB schemes, showed pension fund assets at almost £1.6trn and liabilities of just over £2trn.  What’s more, things could get worse.  Actuaries have warned that even a slight fall in bond yields would see the pension deficits outstrip their aggregate profits by 2019.  No wonder so many schemes are struggling – and why so many members, anticipating falling returns and incomes, are considering transferring to schemes whose prospects are more healthy.

Review your situation while there’s still time to take action

UK Self Invested Pension Plans (SIPPs) have become a useful tool for those looking to transfer a pension pot into a more attractive scheme.  If you are a few years off retirement then a SIPP may be more cost efficient than a QROP, saving you several thousand pounds over the course of a few years. The normal route is to transfer into a SIPP, then transfer into a QROPS around the time of retirement.  One reason for this is to mitigate the possible negative effects of currency exchange movements – if your funds are in sterling, but you live in the Eurozone, any fall in the pound will reduce your income and make it harder to meet your monthly commitments.

If the correct UK SIPP is selected it is then a simple process to move your pension pot into a QROPS when the time comes.   This is beneficial for the following reasons – A QROPS enables you to:

  • Leave a full pension for your surviving spouse instead of a reduced one
  • Pass on your pension pot to your next of kin instead of it being retained by your pension scheme provider
  • Mitigate IHT in some jurisdictions
  • Hold a large array of investments in many asset classes
  • Reduce foreign exchange rate volatility
  • Still take your pension commencement lump sum
  • Relax – no more worries about being in a struggling company scheme that may collapse
  • Take control of your retirement

However, with all the uncertainty surrounding the outcomes of Brexit, a QROPS may not be your best option.  Before transferring to a QROPS scheme you should conduct a full review of your financial affairs.  For some people the right decision may be to leave the pension in the UK and retain the benefits offered by the existing pension scheme. Alternatively, there are also many people who would be better advised to make a transfer.

Review now and you won’t regret later!

If you have a private, company or personal pension in the UK then you need to review it.  And you need to do this as a matter of urgency – as some potentially advantageous options may be restricted or withdrawn in the very near future.

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Investments & Pensions for Europe

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