An increasing number of UK pension holders are transferring their benefits internationally. But why are so many taking action, and should you be too?
For more insight, The Local spoke to Darren Height, CEO of Belgravia Wealth Management, an independent financial advisory company that operates internationally.
Height explained that anybody who left a pension behind in the UK should understand their options to see if a pension transfer is in their best interests.
“Anyone who has previously worked in the UK and left their pension behind should really understand their options,” advises Height.
Particularly, he says, if you have a final salary pension with a company that may not be able to fulfil its commitments in the future.
A 2016 report by PWC found that the UK pension deficit currently stands at £460 billion (€517 billion), leaving many pension holders with a significantly lower income, or, in some cases, none at all. This has understandably led to a lack of confidence in the schemes, prompting pension holders to transfer out.
Height recommends that, as a first step, people look into the funding of their current scheme to find out whether it's running in deficit.
He adds that the current instability in the UK is also cause for concern. As Brexit approaches, he advises UK pension holders to make themselves aware of the possible repercussions.
In March 2017, the British government announced it would begin charging a 25 percent exit taxation on all international pension transfers outside of the EEA or to a country without an HMRC qualifying scheme where the client is resident.
Currently, those living within the EU aren't affected but Height predicts it won't be long until they will be.
“We in the industry believe that once Brexit happens different taxes will be imposed on UK pension holders no longer residing in the UK but living within the EU,” he says.
Height explains that the government sees pensions as low-hanging fruit in terms of taxes, and are beginning to aggressively go for non-residents.
“These pensions were designed in a specific way so that there was tax relief, because the tax would eventually be going back to the government,” he says.
He speculates that the government will soon target people moving abroad and not putting their tax back into the UK treasury.
Height continues by recommending people look at the changes to the lifetime allowance on pensions.
There had been no limit to the pension lifetime allowance prior to 2006 when it was set at £1.5 million, after which all savings are heavily taxed. This rose to £1.8 million in 2010/11, and has steadily dropped in the years since. In the last three years, this allowance has reduced by 33 percent, to a tax-free allowance of £1 million.
So, what are the options to avoid the predicted tax grab and safeguard your future?
Non-residents can transfer a UK pension and place it into a QROPS, a Qualifying Recognised Overseas Pension Scheme. This means that the scheme has been approved by HMRC even though it operates outside of the UK.
"There are major benefits for people transferring their pension to an HMRC-recognised pension,” says Height.
First off, he explains that they can access their pension from age 55 and the pension income will be passed on free of UK income tax. Pension holders also have full control of the currency, which can be converted at any time.
What's more, in an HMRC-approved pension, proceeds can be passed on tax-free when the individual passes away. This allows beneficiaries to avoid UK taxes upon death, instead ensuring they get the full 100 percent of the deceased's pension.
It might sound straightforward, but transferring your UK pension internationally is a complex process that, without expert help, can take years.
“It's very complicated and admin heavy,” says Height. “There need to be link-ups between the pension trustees and a lot of the time UK FCA advice is needed too. I met someone in Paris who had been trying to transfer for two to three years and couldn't do it!”
With the help of a financial advisor at Belgravia Wealth Management, the entire process can be turned around typically in four to six weeks.
There's no cost to the client when transferring, instead Belgravia charges the financial institution such as the pension trustees. No money is transferred to Belgravia, the company simply facilitates the transfer directly from trustee to trustee.
“We just guide people through the process,” says Height. “We take them by the hand and show them the way down the path.”
This article was produced by The Local Client Studio and sponsored by Belgravia Wealth Management.