So, you’re moving to Spain (or have already made the move). You may have decided to retire to Spain and are wondering what to do with your UK pensions … your UK financial adviser could also have said that they can no longer advise you due to your move. That’s because in order to advise someone living in Europe, a financial adviser must be regulated within Europe … this has become an issue for many people post Brexit.
There are other issues to consider when taking advice on your pension … the quality of the advice you receive and avoiding scams. Pensions are a complex area and in Europe financial advisers should be qualified to level 3 as a minimum (although this is not enforced) and in the UK the requirements are higher. I am qualified to level 7 and hold the Chartered Insurance Institute Qualification of Pension Transfer Specialist … this particular qualification is an indication that an adviser has advanced technical knowledge on pension transfers with a full understanding of all implications. Any genuine adviser who knows their stuff and has done the studying will not mind you checking out their qualification level… if they are evasive, treat it as a red flag!
After establishing who you are taking advice from, there are a number of options open to you in respect of your UK pensions. Whether they are personal pensions, SIPPs, Stakeholder pensions or company pensions, it is important to understand how your pensions fit into the jigsaw of living abroad, especially in respect of effective tax planning and flexibility.
Let’s first talk about how UK pension legislation changes have broadened your options when you choose to live abroad.On 5th April 2006 new pension reforms for UK personal and work pensions came into effect, allowing anyone with a UK registered pension scheme who lives abroad to transfer their UK pensions out of the UK for the first time.
QROPS stands for Qualifying Recognised Overseas Pension Scheme. It’s the name HMRC originally gave to an overseas pension scheme that meets the criteria HMRC require to be listed as an approved scheme for your UK registered pension scheme to be transferred to. HMRC are keen to ensure that the transfer is to an appropriate scheme. It makes sense when you consider that you’ve received valuable tax relief whilst contributing your UK pension.
A QROPS must apply to HMRC to be added to the ‘ROPS’ list (Recognised Overseas Pension Scheme), and only if it meets HMRC’s standards will it be allotted a QROPS number. The QROPS must meet the requirements laid down by Sections 150(7) and 150(8), plus certain criteria within Section 169, of the Finance Act 2004 to be considered suitable.
Among these criteria is one that states that the member is only able to draw from the pension once they hit minimum pension age. This is currently age 55, but will increase to age 57 in 2028, so be wary of any offshore scheme that offers access or loans from your pension before age 55 (with the exception of early retirement due to ill health) as they’re likely to be a scam! As a minimum you could end up with a hefty penalty from HMRC of 55% tax on the value of your pension for accessing your pension too early (an unauthorised payments charge of 40% and an unauthorised payments sanction charge of 15%)!
Who should consider a QROPS and why?
The tax efficiency of your pensions, whilst important, isn’t likely to be your first thought when moving countries. However, it can soon become a consideration as you settle into your new life and start to look at the tax implications in respect of your finances when living in Spain. To be clear, I’m not talking about the UK State pension, which cannot be moved and is always paid gross (but taxable) wherever you live.
I’m talking about any other type of pension scheme … a personal pension, stakeholder, SIPP, GPP, or a company pension.
QROPS are tightly regulated and to qualify for a pension transfer into a QROPS the following rules apply and you must fall into one of these categories:
• Currently be a member of a personal or occupational pension fund
• Have been or expect to become a non-UK resident for a minimum of 5 years
• Have not yet purchased an annuity
• You plan to remain tax resident in the UK but your total pension fund values are likely to exceed the lifetime allowance (QROPS may offer effective tax planning as any future growth is not subject to the lifetime allowance charge for UK tax residents)
• You have deferred pension benefits from a previous company pension scheme and you wish to consider your options
It is not possible to transfer your UK pension into a QROPS if:
• Your pension is a UK State Pension
• You have already purchased an annuity
• Under normal circumstances you plan to remain tax resident in the UK.
Tax efficiency
The first thing to remember is that tax rules and regulations on pension lump sums and pension income can be different in each country and are subject to change. So any tax applying to you will be dependent upon your country of residence AND where your pension is situated, together with the type of pension scheme you have in place.
Also, from 9 March 2017 The overseas transfer charge was introduced by HMRC. The charge arises if you or your QROPS are based outside of the EEA within the first five years after transferring to a QROPS; the charge is 25% of the value of your pension transferred. In order to avoid this charge, you need to be resident within the European Economic Area (EEA) and the QROPS also needs to be established within the EEA. This is an important consideration. For instance, if you plan to move to Dubai or America within five years of establishing your QROPS a charge of 25% of the amount transferred would apply … in this instance, a move to a QROPS is not likely to be a wise move!
Income from a UK personal/company pension
Initially when taking income from your UK pension you will be given an emergency tax code by HMRC, which will later be adjusted, with income from any UK pension scheme normally taxed under Pay As You Earn guidelines (PAYE) in the UK. For most people, this means paying tax on pension income at the basic rate of 20%. For higher-rate taxpayers, this tax would rise to 40%, while additional-rate taxpayers (those with a taxable income over £125,140) would pay a tax rate of 45%. As a Spanish resident, the pension income should then be added to your Spanish tax return, the appropriate tax paid and you will need to reclaim the tax paid in the UK under PAYE from HMRC.
By comparison, QROPS income (dependant on the jurisdiction) is paid gross. This makes life much simpler because you do not need to deal with different tax authorities.
How is QROPS income taxed in Spain?
The way QROPS income is reported in Spain is a grey area as the Spanish don’t really understand QROPS; so it’s down to each individual to decide how the income is reported. QROPS are ‘typically’ taxed as a five year temporary annuity, resulting in a marginal rate of 3% income tax. This offers fantastic tax planning opportunities for those living in Spain when compared to the tax paid under PAYE on UK pension scheme income!
Pension Commencement Lump Sum
Known by many expats as their ‘25% tax-free cash’, whilst tax free when living in the UK, it is not tax free when living in Spain. 60% of any pension commencement lump sum is taxed as income for that year when you are Spanish tax resident (irrespective of the type of pension) … so the timing when taking any 25% pension commencement lump sum (PCLS) is crucial. If you are thinking about taking your tax-free cash, and are also moving to Spain, I strongly urge you to take the 25% before becoming tax resident in Spain.
Lifetime Allowance charge
Any pension savings above the Lifetime Allowance (£1,073,100 from 6 April 2021) were liable for a tax on the excess called the Lifetime Allowance charge. In the Spring budget 2023 it was announced that the Lifetime Allowance Charge is to be removed completely, effective from 6th April 2024.
While on the face of it this will simplify pension planning for those with substantial accrued Defined Benefit pensions and larger Defined Contribution funds, consideration to who could be in power after future elections becomes a key issue.
Why? … The opposition stated that they would repeal this legislation if elected. Within 48 hours they updated their views to retain the Lifetime Allowance (LTA) but not for Doctors, but this then changed to other “key workers” or maybe having 2 different LTA rates!
The constant adding of ‘layers of simplification’ only makes retirement planning more uncertain. The opposition party’s response muddied the waters and is seen as unhelpful. The general view is that both parties should really be treating pension planning for the long term, not a political football!
For these reasons our preference is to take a belts and braces approach to your retirement planning, future proofing your financial planning as much as possible. Therefore, I have detailed below information regarding the Lifetime Allowance Charge, which may affect any future transfers to a QROPS should the UK Government do a U turn at future budgets.
Also worth noting is that despite the removal of the Lifetime Allowance Charge, the Pension Commencement Lump Sum (PCLS) will be limited to 25% of the current £1,073,100 LTA- at this stage it does not appear to be indexed. That said, any pensions from before 2006 will still have their PCLS rights protected (where they may be greater than 25%).
The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income, as follows:
Lump sums:
Any amount over your Lifetime Allowance that you take as a lump sum is taxed at 55%. Your pension scheme administrator will deduct the tax and pay it over to HMRC, paying the balance to you.
Income:
Any amount over your Lifetime Allowance that you take as a regular retirement income attracts a Lifetime Allowance charge of 25%. This is on top of any tax payable on the income in the usual way.
So what’s the opportunity in respect of the Lifetime Allowance and QROPS?
A transfer to a QROPS is a benefit cystallisation event, where a final lifetime allowance check is completed upon transfer. No further lifetime allowance checks are completed at any time in the future, regardless of your tax residency. Any growth on your pension fund once transferred to a QROPS is not subject to the Lifetime Allowance Charge. This is another massive benefit to those who are in danger of exceeding the Lifetime Allowance as the move to a QROPS results in any future growth to be outside of the equation completely.
DEATH BENEFITS - TAX CHARGE ON INHERITED UK PENSIONS AS OF 6 April 2015 – CLIFF EDGE AT AGE 75!
Income: From April 2015, beneficiaries of individuals who die under the age of 75 with remaining UK uncrystallised or drawdown defined contribution pension funds (typically personal pensions and SIPPs) or with a joint life or guaranteed term annuity, are able to receive any future payments from such policies tax free where no payments have been made to the beneficiary before 6 April 2015. The tax rules also changed to allow joint life annuities to be paid to any beneficiary.
Lump Sums: If the individual dies before age 75, the beneficiary will pay no tax on the funds.
All good so far, so what’s the ‘cliff edge?’…
This is the less known and yet very important issue. Where the deceased pension policyholder was age 75 or more at the date of death, their beneficiary (often their spouse or children) will pay their marginal rate of Income Tax on the pension income/lump sum paid out on death. This effectively creates a cliff edge at the age of 75 after which the tax-free benefits are lost!
However, every cloud has a silver lining! From a QROPS, once you have been non-UK resident for five complete UK tax years, the whole fund can be passed free of UK tax, and in some circumstances can continue to run (thereby keeping the funds outside the estate, since the ultimate beneficiaries may be your children). This is a massive benefit when considering the ‘cliff edge’ mentioned above, where the payment of benefits tax-free ends with UK pension schemes on death from age 75.
Also worth noting is that as a Spanish tax resident QROPS can help your beneficiaries avoid Spanish Inheritance Tax on the pension from inception due to the structure within which they are held.
Wills and QROPS
Finally, if you want to make life easier for those you leave behind, consider this … with a QROPS there is no requirement to wait for a Will to be processed on death and all the bureaucracy that comes with that in respect of either probate or the Hacienda. Proceeds from a QROPS are paid out immediately and directly to your named beneficiaries, which could alleviate a lot of stress and worry for your loved ones as it frees up cash that can be used to pay any inheritance tax bill due. It’s important to understand that in Spain your inheritance tax bill must be paid before assets can be transferred to your loved ones … a consideration, for instance, if you are leaving a property to your children as they will be unable to sell the property before paying any tax due!
To summarise
As you can see, QROPS can offer many advantages when living in Spain. It’s important to get advice specific to your particular situation before your move and ongoing advice after making the move, as guidelines and rules can change and there are different ways of setting up a QROPS that can affect what happens in the event of your death. How you hold your assets can have a big impact on the tax you and your loved ones pay in Spain AND the UK should you die after reaching age 75!
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
admin@speedfinancialsolutions.com
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
14 June 2023