How Brexit affects pension planning

As the March Brexit deadline approaches, there are still many uncertainties around the future financial planning and investment landscape.

One specific area that we are increasingly confident will change on the UK’s expected departure from the EU is the scope for clients to transfer their UK pensions to an offshore scheme (a Recognised Overseas Pension Scheme – or ROPS).  This currently confers significant advantages to the following individuals:

1. Clients who are close to, or have breached their pension lifetime allowance.
   The lifetime allowance is currently £1,030,000 and anticipated to grow in line with inflation.  A client will be tested against the lifetime allowance on one of 13 possible occasions during their lifetime – including at age 75 or death if that occurs beforehand.  Any excess over the allowance will be charged a tax rate of 25% if drawn as income (in addition to income tax) and 55% if drawn as a lump sum.  However, if the pension is transferred to an offshore scheme this is the last time it is tested against the lifetime allowance, and can grow thereafter without reference to the allowance, whilst still receiving the same IHT, CGT and income tax treatment as a UK pension.  If a client is approaching, or has exceeded the lifetime allowance, this can be a hugely valuable planning opportunity to mitigate or minimise any tax liability.
2. Internationally mobile clients.
   If a client has accumulated a UK pension, but plans to retire outside the UK, they should consider a transfer to a QROPS.  The client will have more investment flexibility and critically can draw income (as required) in their reference currency (whereas income from UK based plans can normally only be drawn in GBP).  Furthermore, depending on the double tax agreement between the jurisdiction in which the client lives and the location of the QROPS, there may be scope to draw pension free of income tax.  Finally, a pension in a QROPS is no longer governed by UK pension legislation (although certain restrictions and reporting requirements persist for between five to ten years after the transfer).

Transfers to pensions outside the EEA currently confer a 25% exit charge.  Since the capability to transfer a pension within the EEA free of a transfer charge is a direct result of EU human rights requirements around the freedom of capital, our expectation is that this charge may well apply to all pension transfers after Brexit, thus effectively closing this planning opportunity.

Whilst our firm is not one that likes to push a particular product or solution above others, we do feel this planning opportunity is worth flagging whilst the scope to make a transfer exists.  For further information, do please get in touch with us to find out more. Please contact [email protected].