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CROSS BORDER PENSIONS ADVICE

Fiduciary Wealth Team

In our experience the biggest single dilemma most people face when moving to another country is what to do about their pension. This dilemma can be further exacerbated by not having established formal residency in the country to which you have moved. Being a residential nomad causes sleepless nights and is not good for your health financial or otherwise!

The fact is that unless you are formally resident outside of the UK, or you intend to be so in the very near future your choice is limited i.e. you must adhere to UK pension rules. In practice this means investing through a UK pensions vehicle probably a self invested personal pension (SIPP) unless you are one of the dwindling few lucky enough to enjoy the benefits of a company sponsored pension scheme.

You will have been delighted to hear that the new coalition government intends to withdraw the need for compulsory annuity purchase at age 75; you will be less delighted to know that there will still be a significant tax charge on your fund at your death before your family can benefit. The death charge can have a devastating effect on the amount your beneficiaries can receive. Before age 75 this is 35% of your fund once you have taken your tax free lump sum and after age 75 it is currently 82% possibly reducing to 55%. The government has made it crystal clear, pensions are not intended as a vehicle to pass wealth to future generations. 

So are you caught in the trap, living in Spain or Portugal but a financial nomad not officially tax resident anywhere and having drawn the tax free cash element of your pension pot? Let’s assume you had a fund of £1 million and you took your
£250,000 tax free cash. Die before 75 and your beneficiaries will currently pay £262,500 (35%) in tax should they want the rest of your fund as a lump sum, die after 75 and the current tax charge could be as much as £615,000 (82%) and even under the proposed changes £412,500 (55%). Would you really want the fund that you have worked so hard to accumulate to be depleted in this way?

What about drawing income. Any income you take in the UK is included in your total earnings and taxed at your highest rate which could be as much as 50% whereas a tax resident of Spain or Portugal could be paying less than 10%. Wouldn’t you want to legitimately minimise the tax payable on your retirement income?

The alternative for those who have formally established residency outside of the UK is to consider transferring your pension to a QROPS (qualifying recog- nised overseas pension scheme).

So what can a QROPS do that a SIPP can’t.

First of all legislation currently avoids the need for compulsory annuity purchase but with the additional benefit that the whole of the fund can be passed to your beneficiaries tax free.

Second you can choose the currency you wish to invest in and draw your pension income. This could be sterling or euros, not such an easy choice when the pound has been in decline but an option to consider all the same and an opportunity to convert at some stage in the future.

What about income? Drawing income from your fund outside of the UK could be a major advantage. Depending on where the original contributions originated the tax rate on income drawn could be in single figures in Spain and Portugal.

It’s clear that it is not just a case of SIPP ver- sus QROPS, you need to have the correct residential status to take advantage of QROPS and if you don’t have this you need to protect your benefits in a SIPP against a future tax charge. There are other issues to consider too, the withdrawal tax relief on contributions for high earners and alterna- tive investments for tax efficient savings.

Most important you need to speak to an adviser who can sort out these cross border issues for you. At Fiduciary Wealth we are experts at working with other professionals to offer complete solutions to situations like this. We can manage your SIPP, we can help you protect the interests of your beneficiaries, we can transfer your SIPP to our QROPS, above all we can look after your interests in the UK and overseas.

Can you really afford to remain under the radar knowing that your beneficiaries will suffer if you die and your retirement plans could be jeopardised by having to pay more tax than necessary?