One of the things you need to keep track of is taxes. If you’re not properly informed, you could unknowingly make choices that lead to a significant chunk of your savings going to taxes. Ex-pats face the greatest difficulty on this matter. With all these rules and tax rates varying between countries, plus the added complication of Brexit, it can be hard to keep track. Today we’ll give you a brief primer on something called the pension transfer tax.
What is the pension transfer tax?
Previously, ex-pats could transfer their pension fund abroad or into a Qualifying Recognised Overseas Pension Scheme (QROPS) without paying any taxes, unless the total exceeds the lifetime pension allowance. Now, however, HMRC can claim up to 25% of the funds being transferred. This amount is known as the pension transfer tax. With this new tax, HMRC can collect up to £315 million by 2022 out of the 15000 QROPS transfers every year.
Is everyone subjected to the pension transfer tax?
There used to be a few rules that exempted ex-pats from this tax. You’re not subjected to pension transfer tax if:
- Your QROPS and you are in a European Economic Area (EEA)
- Your QROPS is run or sponsored by your employer
However, with Brexit eliminating many of the UK’s deals with the EU, the first rule may soon be nullified. Without the guarantee of tax-free QROPS transfers even for ex-pats within the EU, it’s wise for those considering a transfer to do it as soon as possible. Acting now may be the difference between getting all your money or losing 25% of it to tax alone.
Why transfer your pension in the first place?
Transferring your pension to a QROPS offers many benefits. For one, a QROPS can consolidate your pensions, saving you from multiple taxes. QROPS funds are also shielded from UK income and gains tax and any changes to pension rules in the future.
QROPS also offers greater diversification of your investment portfolio compared to other pension schemes. UK state pension pay-outs are also made in pounds sterling. Meanwhile, QROPS provide the option to hold and draw your funds in any currency you need. This prevents your funds from fluctuating due to volatile exchange rates in times of economic instability. Another limitation of UK pensions is that they are payable exclusively to your spouse upon your death. A QROPS allows you to include other beneficiaries.
Things to consider moving forward
As mentioned, UK ex-pats in an EU country need to brace themselves for how Brexit may affect their pension and taxation rates. It’s best to consult experts at Pensions for Expats to determine exactly what the best course of action is from here. Even if you conclude that you don’t want to transfer your pension to a QROPS, it’s also wise to consider other options to stabilize your pension plan. With COVID-19, Brexit, and all the disruptions to the UK’s economy, it’s in your best interest to be prepared for anything.