If you’re thinking about moving overseas in retirement, one of the most important considerations will be what to do with your UK pension. Find what options are available to you in our guide.
There are a lot of questions when it comes to your UK pension options when you retire abroad:
- Do you leave your pension in the UK?
- Do you take it abroad with you?
- How can you move your pension abroad?
- How will your pension income be taxed abroad?
- What about your state pension?
- And the most urgent one: how does Brexit affect your UK pension abroad?
This guide will help you understand what options you have regarding your UK pensions, their advantages and disadvantages, what happens to your state pension and what you need to do to continue receiving your pension income without interruption when you move abroad.
Brexit impact on UK private pensions abroad
As financial services were left out of the Brexit deal, it might impact you directly if you are planning t retire to the EU.
Your pension payments might be affected by Brexit.
Not all UK pension providers can continue to pay your pension into an EU bank account. Before you move, check with your pension provider whether they can do it.
If you are planning to keep your UK bank account and receive your pension into it, you need to ensure your bank will allow you to keep your UK account open when you become a EU resident.
Possible options to resolve the problem:
- Have a Sterling account in your local EU bank and use a forex company to exchange your GBP pension payments into Euro;
- Use an e-money institution such as TransferWise, for example, which offers multicurrency accounts. You will have a sterling account into which your GBP pension payments will be paid which you can exchange into Euro and transfer into your Euro account all within one app;
- Depending on your personal circumstances there are other solutions that can be more beneficial for you than your existing arrangements. Consider speaking to a qualified financial advisor to make sure you have the most appropriate solution in place.
Your UK based financial advisor might not be able to advise on your investments when you become a resident in the EU.
If you move to the EU and still have UK investments, your UK-based financial advisor might still be able to work with your UK investments. However, the financial plans that have been established for you as a UK resident will not be ideal when you become a resident of another country.
Being resident in the EU means you are subject to different taxation and legal regimes than those that apply in the UK. Your UK advisor might not have a sufficient understanding of the taxation and legal implications of any advice they give to a non-UK resident.
Moreover, if you have or are planning to have savings and investments with an EU-based institution, your UK-based advisor cannot instruct them regarding your investment products.
The best way to proceed is to revise your financial planning with the help of an EU regulated advisor. It can help you minimise taxes while changing residency and take the most tax-efficient decisions when settling down in your new country of residence.
Your UK based investments are not necessarily EU compliant now.
Various EU member states have given a grace period to allow EU residents to review their UK based investments and convert them if necessary into something that is more EU compliant.
After the grace period is over, you are still allowed to hold your investments in the UK, of course. What might happen is that your UK based investments will become tax-inefficient.
Option 1: Leave your pension in the UK
There are options as to what you can do with your pensions. These include an income drawdown plan, or an annuity, taking lump sums from your pension fund when you need them, etc.
If you have a UK pension and you’re over the age of 55, you can take your entire pension and do whatever you want with it. You could close your pension and take the whole amount as cash in one go if you wish.
Normally, for UK residents, the first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.
If you leave your capital in the UK and move abroad, you will have to deal with regular currency transfers when moving money from your UK account into your overseas account. Make sure you don’t lose out. Shop around for the best options and compare the available rates.
Retiring abroad means you become a tax resident of your new country of residence. In many cases, if you retire to an EEA country under the Double Taxation Agreements, your pension will be taxable in your new country of residence, not in the UK.
To take advantage of the UK’s 25% tax-free lump sum rule, you would want to take this before moving abroad while you are still a UK tax resident. If not, you will be taxed according to local taxation rules in your new country of residence, where the 25% tax-free pension rule might not be applicable.
The rest of your pension income will be taxed according to your new country’s taxation rules.
Some countries, such as Portugal, Malta, Italy and Cyprus, have very lenient tax policies when it comes to expats and their foreign-sourced income. Make sure you are in a good position to take advantage of this.
Facts & figures:
In Portugal, you can pay a flat tax rate of 10% on your UK pension and other foreign income for the first 10 years of residing in the county under the Non-Habitual Regime, provided you are qualified.
In Italy, you can pay 7% tax on your pension income for the first six years of residency.
In Malta, your UK pension income will be taxed at a rate of 15% under the Retirement Programme, provided you are qualified for it.
In Cyprus, you can opt for a flat tax rate of 5% on your pension income.
Research your country’s taxation rules thoroughly or, better, speak to a tax specialist. Depending on your destination there might be some really great opportunities for you that you don’t want to miss.
A tax specialist can make sure you use all the available tax optimisation strategies to increase your after-tax income.
Facts & figures:
With all the allowances, discounts and reductions available, a retired couple in France would not pay any income tax in 2019 if their net taxable income in 2018 had not gone over €27,974 (£25,000). Above that, it would be just 14 percent up to €73,000 (£65,500).
In Cyprus, as a pensioner, you can alternate between paying a fixed tax rate of 5% a year on your pension income or choosing tiered income tax. The year your retirement income exceeds €25,000 you will start saving money on tax by switching over to the flat tax rate of 5%.
Option 2: Take your UK pension as cash and invest as you see fit in your new country of residence
Another option is to take your UK pension as cash and reinvest it into a tax-efficient, compliant arrangement in your new country of residence.
This might be a good choice if you are an experienced investor and understand what you are doing. However, you might want to take independent financial advice to make sure you invest in products that best meet your individual needs.
There are many factors involved, including your financial goals, the size of your pension, your new country of residence’s taxation rules, available investment products, your appetite for risk, etc.
All these need to be taken into consideration to make sure your retirement is safe and secure when it comes to money. A regulated financial adviser can help you with your financial goals and investment options.
Facts & figures:
In France, lump sums from pensions are not taxed at marginal rates. Instead, they are only subject to a 7.5% income tax charge, no matter how big the withdrawal.
This means you can theoretically take your whole pension, pay 7.5% tax on it and reinvest the rest appropriately. However, to qualify you would have to establish tax residency in France before taking your lump sum.
Option 3: Transfer your UK pension overseas
There is an option to transfer your UK pensions abroad into a QROPS (Qualifying Recognised Overseas Pension Scheme) or ROPS as it is called now.
ROPS is a pension scheme specifically for UK citizens who no longer live in the UK.
It stands for Qualifying Recognised Overseas Pension Scheme. However, the HMRC insisted on dropping the word “qualifying” from the name. So strictly speaking it is now the Recognised Overseas Pension Scheme (ROPS), although the abbreviation QROPS is still widely used.
The potential advantages of transferring your UK pension overseas
If you are retiring abroad, you could potentially benefit from transferring your pension into a ROPS. The advantages of this include the following:
- You may want your pension to be in your chosen country so you are not receiving income in sterling and spending in a different currency, avoiding exchange rate fluctuation.
- You may also find it easier to keep track of tax and regulation changes if they happen in the country where you reside.
- You can often access offshore investments and savings that could deliver better returns.
- You can have a tax-free lump sum of up to 30% if you have been abroad for 5 years or longer.
- You can potentially get access to onshore/offshore funds and the highest fixed deposit rates.
- You may be able to take an income from your pension in a more tax-efficient way.
- You can potentially protect yourself from Lifetime Allowance tax, which you have to pay when your UK pensions are worth more than £1,073,100. Once transferred, your pension pots can grow without risking further LTA tax.
- You can potentially protect your estate by inheritance tax planning, and pass on your wealth to your family with less of a tax burden.
The above benefits of QROPS are theoretical. To understand whether you can individually benefit from them, you need to take into consideration your personal circumstances: the size of your pension and investments, where you want to transfer your pension, which county you are moving to, etc.
You can only transfer your pension if you use qualified and regulated financial services. You should always take fully regulated financial advice before transferring to a QROPS. The advice must include both the potential benefits and losses of transferring your pension and enable you to consider ALL the available options!
Facts & figures:
If you retire to France and reinvest your pension into a suitable assurance-vie – a specialised form of life assurance where the underlying investments attract no tax in France – this may be more beneficial than a QROPS.
The ROPS pension option might not be suitable for everyone. Also, a pension provider needs to comply with strict regulations to be qualified as ROPS.
As of 9th March 2017, transfers to ROPS are subjected to a 25% tax charge unless certain conditions apply. To avoid the 25% tax, the individual and the ROPS must be in the same country after the transfer, or the ROPS must be in one EEA country and the individual in another EEA country after the transfer.
If the ROPS is an occupational pension sponsored by the individual’s employer, the 25% tax charge doesn’t apply either.
Depending on your personal circumstances and whether you comply with the conditions stated above, ROPS might be a perfect option for you. To understand whether this is the case and whether you can benefit from transferring your pension to a ROPS, seek qualified advice.
Having your UK state pension paid abroad
If you are eligible for a UK state pension, it will be paid to you no matter where in the world you choose to live.
Brexit impact on state pensions paid overseas
If you’re entitled to a UK state pension and retired abroad (as currently over 220,000 Britons are) or are planning to retire overseas, – you will get your state pension paid just as British residents do.
The annual increase in the UK state pensions paid abroad
The annual inflation-linked increase depends on the country you are retiring to.
If you retire to one of the EEA countries, Gibraltar or Switzerland, your pension will be annually indexed in line with inflation, which means you will get a year-on-year pension increase.
Under the terms of the Brexit deal, if you are living in one of those counties and are eligible for a UK state pension, you will continue getting your pension annual increase.
State pensions will continue to be updated if you live in one of the countries that have bilateral agreements with the UK to protect their citizens’ social security rights: Barbados, Bermuda, Bosnia-Herzegovina, Jersey, Guernsey, the Isle of Man, Israel, Jamaica, Kosovo, Macedonia, Mauritius, Montenegro, the Philippines, Serbia, Turkey, and the USA.
Those who are retired or planning to retire to a country not listed above will get their state pensions paid, but the level would be frozen.
Receiving your UK state pension abroad
Once you qualify for the UK state pension, you can claim it no matter where you live. The money can be paid into a UK bank or directly into an overseas account in the local currency, cutting out transfer fees and bank charges.
You can choose to be paid every four or 13 weeks, but if your State Pension is under £5 a week, you’ll be paid once a year in December.
If you opt for a local bank, you will receive the pension in a local currency, so the amount will vary according to the exchange rates.
Making your pension last and deliver the lifestyle you want in retirement
Planning your money management in retirement isn’t an easy task. There are many options available for investing your savings. There’s no doubt that when it comes to retirement, we all want the best income and investment solutions for our hard-earned pensions.
Yes, pension freedom means you can withdraw or transfer your pension. However, it’s not always the best solution for you. It depends on your future plans, the size of your pension pot, your country of residence, and many other factors.
What you need in the first place is a reliable plan to fund your long-term future that matches your personal circumstances and goals.
Beware of pension scams. Make sure you get advice from a professional and reputable international financial advisory.
Your adviser should always consider your personal needs, objectives, personal circumstances and risk appetite to find the best solution for you and your family. Getting it wrong could have serious and unexpected consequences.
Need help with assessing and planning your overseas retirement income post Brexit?
Our premier alliance partner Holborn Assets provide a brilliant free no-obligation service – a personalised and tailored Expat Retirement Planning Report. The report is tailor-made for you, based on your personal circumstances, your country of residence and your financial goals.
Inside your report:
- A free personalised financial health check and summary;
- What your post-Brexit pension options are;
- How you can structure your savings and pensions in the most tax-efficient, country-compliant way;
- How to get better interest rates for your savings;
- How to ensure you have the correct plans in place for you and your family.
For your free, no-obligation report get in touch with the Holborn Assets team.
You might find useful:
- How To Access Best Quality Affordable Healthcare When You Move Abroad – how to apply for an EHIC and S1 form and what you need them for;
- Banking, Saving, & Investments Abroad – a simple guide to your bank accounts and investment options when you become an expat;
- Offshore Portfolio Bonds – The Tax Advantages Explained
- Visit our homepage for a comprehensive range of Living Abroad guides.