If you are in the process of providing pension advice to clients who are thinking of retiring to mainland Europe, the vote on 23 June for the UK to leave the European Union (EU) will add an extra dimension.
The consideration over what advice to give to clients who are musing over retiring to a country such as Spain, Portugal or France is constantly evolving and, with the additional pension freedom legislation introduced in 2015, it is now more important than ever to explore all options before taking action.
The state pension
Today, UK expatriates residing in the EU receive the state pension annual inflationary increases as a right of membership. If the UK were to become a member of European Economic Area, then this position would remain the same. But if nothing is negotiated in the next two years, the right to the increase will potentially fall away from March 2019.
The UK has several longstanding reciprocal agreements with a number of current EU members where the “triple-lock” increase is built in. But since 1981, we have not negotiated any such agreements with new members.
This could mean UK expatriates residing in countries where old agreements exist, such as France, Italy, Luxembourg, Ireland and Switzerland, will receive increases, whereas UK nationals resident elsewhere in the EU will not. The potential for missing out on the annual inflationary increase will need to be factored into any advice.
Taxation of pensions
Cross-border pension taxation is not determined by our relationship with the rest of Europe. It is determined by the 130-plus bilateral double tax treaties the UK has with other countries around the world, including its EU neighbours.
Most of these treaties follow the template set by the Organisation for Economic Co-operation and Development, whereby the taxing rights in respect of the state pension and private or company pension scheme lie with the country in which your client resides.
A UK government pension remains taxable in the UK, and not taxable overseas, apart from in the UK/Cyprus double tax treaty, which gives the taxing rights to Cyprus.
Retiring clients often take the opportunity to consolidate their pensions into one scheme, such as a qualifying recognised overseas pension (QROP) or a self-invested personal pension.
While the benefits of each structure have virtually been equalised, a QROP does give a client the opportunity to exit the UK tax system, and protect themselves against future changes in pension legislation we know UK governments are prone to make.
Over the past five years, the cost of providing defined benefit (DB) pensions has become much more expensive as returns from gilts and bonds have shrunk. This, coupled with increased life expectancy, has created a significant funding deficit for many company schemes, and has also led to unheard-of hikes in transfer values.
This perfect storm has led to a spike in DB pension transfers, and speculation prevails that the government may try to discourage this trend towards DB scheme exits by changing the law to make withdrawals more difficult and/or less attractive.
You will also need to consider the local tax treatment of pensions – for both income and lump sum – in the country your client is moving to. For example, Portugal will not charge any tax on pension income and lump sums in the first 10 years of residence, while France may tax lump sums at only 7.5%.
Malta and Cyprus could also offer very low rates of tax on pension income and lump sums. The local tax treatment will need to be clarified as part of the overall pension advice.
The Brexit vote has bought sterling exchange rates to the fore again. Given that the base currency for client expenses is likely to be euros, it is worth considering whether pension investments should be held in the same currency in order to eliminate risk.
As always, the best approach for your clients’ pension funds depends on their individual and family circumstances and objectives.
Jason Porter is a director at Blevins Franks Financial Management