No more tax relief on pension income? How Brexit could change your retirement plans
Written by Jonathan Flexer on July 13, 2016.
As all the post-referendum furore and debate is proving, membership of the European Union has both pros and cons and often these are subjective. For expat Brits deciding to retire abroad, one of the biggest pros has been flexibility on pension rules. Under current regulations British retirees living outside of the UK enjoy the right to receive their private and employer pensions as part of a QROPS (Qualifying Recognised Overseas Pension Scheme) which entitles them to take a tax-free cash element of 30%, compared to 25% for those living in the UK, and be exonerated from UK income tax on the money generated throughout retirement.
It will come as a surprise to many that the QROPS scheme was introduced by HMRC in April 2006 as a direct consequence of a key EU directive ensuring the protection of the ‘general principle of the free movement of capital’. This stated that citizens of EU member states should not be restricted in moving their money throughout all member states and applied to UK pensions. The tax benefits enjoyed by Brits choosing to retire outside of the UK are now threatened by Brexit as HMRC would no longer be bound by the EU directive. It is entirely possible that they will seek to block future transfers.
This obviously has huge financial implications for Brits planning to retire abroad as well as those of other nationalities who have UK personal or employer pensions. It could even force some to rethink their plans and abandon their dreams of retirement in sunnier climes.
Under current UK and EU law, if you transfer a UK pension (excluding state pension) into a QROPS and reside outside the UK for more than five years you can take a 30% lump sum from the age of 55 and pay as little as 0% income tax.
Compare this to the situation for a UK resident who is limited to a lump sum of up to 25% with income tax payable at 20 or 45%. Thousands of British overseas retirees (and those with UK pension schemes) stand to lose out hugely if Brexit leads to a change in laws regarding QROPS.
Is this likely? Well the simple answer, as with so many things concerning Brexit, is that no-one yet knows. It is entirely possible that a cash-strapped United Kingdom could try to claw back some much-needed revenue by changing tax rules applicable to British retirees residing abroad.
Even without this big question mark which hangs over QROPS, these pension schemes are far from straightforward and need careful investment management to ensure that you do not fall foul of HMRC rules and invest in non-qualifying funds and asset classes that could incur a tax charge.
To learn more about the legislation behind QROPS pension schemes and how you might benefit from transferring your pension to one, please feel free to contact me by email for an informal chat at firstname.lastname@example.org.