If you have chosen to retire in Portugal, your pensions can be the key to financial security in retirement. With Brexit looming and more options than ever, pensions can also be a source of concern and confusion. However, expatriates can find rewarding – but limited – opportunities.
Crunch time for pension providers
Around 15 million Britons have ‘final salary’ company pensions, where an employer guarantees a fixed income for the whole of retirement. Widely considered ‘golden’ pensions, income depends on salary and length of service but is usually quite generous.
With today’s historically low interest rates and increased life expectancy, many providers are finding it harder to afford promised pension payments. The cost of financing these pensions has soared as returns from the assets underpinning them – mostly UK bonds, or ‘gilts’ – have shrunk. Like BHS, with its £571 million pension deficit, companies with significant shortfalls can fail alongside their pension schemes.
Opportunities for a record pay-out
To offload pension liabilities, many companies are offering members unusually large cash sums (‘transfer values’) to leave. Calculated as a multiple of the annual income due on retirement, it is not unknown for pay-outs to double from 20x two years ago to around 40x since the Brexit vote. In an extreme case, if you had a final salary of £30,000 per year, you may have been offered £600,000 two years ago – but £1.2 million today.
While rare, this example illustrates a tipping point. Properly managed, even more modest sums could provide a retirement income that well exceeds the original annual payment. Although such high transfer values can outweigh the benefits of drawing a guaranteed pension for life, they may not be available for long.
Opportunities for tax benefits in Portugal
Many expatriates transfer their UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) to unlock tax-compliant opportunities in Portugal. This can also offer estate planning advantages. Most final salary pensions are payable to your spouse on death, but QROPS offers the flexibility to include other heirs, even across generations.
However, QROPS tax benefits vary greatly between providers and jurisdictions. Carefully assess your options and use a regulated provider to avoid pension scams.
Even without transferring, expatriates resident in Portugal can enjoy tax benefits on UK pension income. Through the double tax agreement, most personal and non-government service UK pensions are taxable solely in Portugal. For non-habitual residents (NHR), this can mean tax-free UK pension income for the first 10 years.
If you do not qualify for NHR, or once NHR has expired, UK pension income is taxable at the progressive Portuguese income tax rates up to 48%. Under certain conditions, however, it is possible to receive up to 85% tax-free.
Note that UK pension savings (excluding the State Pension) totalling over £1 million will breach the UK lifetime pension allowance. Anything over the limit is liable to 55% UK taxation when taken as a lump sum or 25% as income, wherever you are resident. Those close to this limit should consider HMRC ‘protection’ options or transferring to a QROPS before attracting tax penalties.
Potential limited window of opportunity
There is always scope for tax rules to change. In November, the Portuguese government bowed to pressure from Finland to allow taxation of expatriate pensioners. A new bilateral agreement makes Finnish nationals with Portuguese NHR status liable for Finnish tax on pension income from 2019. This could set a precedent for other countries to recoup revenue from overseas nationals.
There is already speculation that the UK government may start taxing pension transfers for non-residents or change the rules to make withdrawals more difficult. If you decide transferring is right for you, now may be the time to act, as there may be a limited time to transfer without penalties. Consider what could work for you now, under current rules, before the window closes.
Establishing your best approach
Transferring UK pensions comes with risks and many people are better off staying where they are. Take time to fully understand the long-term implications. If you have benefits worth over £30,000, the Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring.
You should at least confirm your current transfer value and check if your scheme is at risk. The government’s Pension Protection Fund only compensates up to £33,678 a year at age 65, so if your pension offers more and your scheme is vulnerable, consider transferring.
With so much uncertainty ahead, there has never been a better time to review your pension arrangements. You can help ensure peace of mind with personalised pension planning that keeps up with any post-Brexit developments and opportunities.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott,
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com