Three Main Areas of Concern
There are three main areas of concerns connected with pensions for expats after Brexit. They are state pensions, private registered pension schemes and insured pensions and payments. Private registered pension schemes include pension schemes in the UK and, while not technically registered, qualifying overseas pension schemes (QROPS).
There has been a lot of scaremongering (mainly by firms promoting the transfer of pensions for expats before Brexit). In brief, they suggest you will lose access to your pension, pay more in tax and have less control after Brexit. However, we can give 4 positions of accuracy that dispels much of the scaremongering straight away:
- Private registered pension schemes do not require passporting rights in order to pay out to EU states anymore that they do to pay out to people living in the Unities States or other third countries.
- The actual tax position on pensions will not change post Brexit as these have never been determined by the EU. The tax position has always been dealt with individually by national governments with respect to any Double Tax Treaty.
- State pensions are determined by the respective governments, whereas the taxation is determined by where you live with respect to any Double Tax Treaty.
- You are able to choose the currency you invest in irrespective of whether you hold a SIPP or a QROPS and it is down to the individual pension firms to decide what currencies are available for investment, and nothing to do with legislation.
These are just a few myth busters, but let’s review the actual position for all 3 areas of concern with respect to pensions for expats after Brexit:
- State Pensions
- Private Registered Pensions schemes
- Insured Pensions and payments
How could Brexit affect your state pension?
UK expats living in the EU are protected by EU law and receive annual inflationary increases to their state pension benefits, whereas those resident in countries such as Australia, New Zealand and Canada do not.
In January 2019, the government confirmed it will continue to inflation-proof the state pension for expats who retired to the EU for a year post-Brexit. Inflation proofing allows for an annual increase to state pensions ensuring that the payments do not lose their spending power for expats (notwithstanding any currency issues). The state pension is currently uprated each year by the higher of either wage growth, inflation or 2.5 per cent.
Baroness Buscombe, undersecretary of state with the department for work and pensions in January 2019, confirmed the UK state pension would continue to be payable worldwide following the UK’s department from the UK. “As the government set out in its policy paper ‘Citizens’ Rights — EU citizens in the UK and UK nationals in the EU’ we want to secure continued reciprocal arrangements covering the uprating of State Pensions in the EU even in the event of a ‘no deal’ exit,” said Baroness Buscombe.
More information about state pensions for expats after Brexit
To be entitled to the annual increase in your state pension you needed to be resident in an EU or European Economic Area (EEA) country, Switzerland, or a country with which the UK has a social security agreement which includes a clause entitling recipients to an annual increase. So what will happen after Brexit?
The administrative processes are already in place to give the state pension annual increase to retirees living in an EU country as is the legal framework, and the UK has been quick to change in the past where there have been changes; examples include the succession to the EU of new countries, the breakup of countries, etc.
Money will be a factor however, as by blocking state increases the government could save money. They could block it permanently or for a short period until the balancing of books has happened post-Brexit. However, the statement by Baroness Buscombe in January 2019 appears to indicate that there is no short term intention of doing this.
Paying extra benefits to expats is not a vote winner in the UK and so only time will tell, but there is little that expats can do, anymore than expats in Canada or Australia can do about it. There are, therefore, arguments both ways and treatment of state pensions for expats after Brexit may lead to a more common approach being taken worldwide.
How could Brexit affect your registered pension scheme?
Current law and practice means the EU have very little to do with private pension regulation. Indeed, MiFID rules specifically exclude pensions, and IDD rules only apply to insured funds (of which for example a Self-Invested Personal Pension – SIPP – is not). Therefore, for most expats, Brexit will have no impact on your pension schemes.
UK pension freedoms are solely a matter of UK law and so whether the UK is an EU member state or not is irrelevant.
As already explained, the taxation of benefits should not affect pensions for expats after Brexit as it is the double tax treaty between two countries that determines taxation where the benefit arises in one country and the recipient is tax resident in another. These are individual agreements between the UK and each country and are not impacted by whether the UK is a member of the EU.
This will not change with Brexit and if you are resident for example in Spain or France, of have the added benefits of low tax in Cyprus or Portugal or live in Italy very little will change.
What about the ability to transfer to Qualifying Recognised Overseas Pensions Schemes (QROPS)?
QROPS were introduced in 2006 after the UK adopted some EU legislation. However, the UK went further and made it possible to make transfers around the world, not just within the EU. Due to abuses by advisers HMRC took action to shut down some of the abuses in April 2017 through the Overseas Tax Charge (OTC).
However, within EU legislation it was not possible to apply the OTC within the EU. This is, therefore, likely to be reviewed for pensions for expats after Brexit
Whilst the UK has a long history of permitting transfers to bona fide overseas pension schemes, it does not like tax abuse.
Mind you, even within the EU, there is often little benefit in transferring to a QROPS other than in certain circumstances.
If you are one of the people that would benefit from considering a QROPS in the EU (and that may only be about 10% of readers), and you have a defined contribution (money purchase) scheme and are concerned the uncertainty of future UK pension reforms, you could consider transferring your funds out of the UK into a future-proof QROPS.
However, if you are told do this because of currency, then think again – it is a lie. You are able to choose the currency you invest in irrespective of whether you hold a SIPP or a QROPS and it is down to the individual providers whether it is allowed, and nothing to do with legislation. Brexit negotiations could result in a weaker sterling and currency could be a way to protect your pension income and pensions for expats after Brexit.
How could Brexit affect your insurance based pensions such as annuities?
This is the basis of most scaremongering. However, whilst it is an area of concern with pensions for expats after Brexit, the concern over spills to scaremongering. This ill-conceived comment is then applied to all kinds of other areas of financial planning as supposed fact, which it is not.
First of all, the myth buster – there is no danger of providers not being able to continue to accept pensions for expats after Brexit who live in the EU.
The idea that your fund, or annuity, will no longer be paid just because you live in the EU is right up there with the idea that the UK has stopped paying pensions (state or private) to people who live outside the passporting rules of the EU. It has not.
So what are the real issues and why do people talk about passporting in the EU all the time?
Passporting is the EU method of allowing companies and individuals to provide cross border services. They apply where you are marketing your company for insurance or investment purposes. Notice, I did not mention pensions!
There are 2 passporting rule based systems – MiFID is for investments and specifically excludes pensions. IDD is for insurance and was originally intended for non-investments and only insurance based products. After a lot of companies pleaded with the EU, the EU (rather foolishly) allowed some insurance based products (including insurance based pensions) to come under IDD.
Is a self-invested personal pension (SIPP) an insurance based product?
No, it is not! It is neither a product that falls under IDD or indeed MiFID.
The fact is that most pensions fall under individual regulators’ control in each EU state and are not covered by either IDD nor MiFID.
So, that should be the end of the argument? Unfortunately not.
The individual regulators can impose their own minimum standards. For example, Malta and the UK both impose an investment licence (Simply referred to as MiFID) on those who wish to advise on pensions like QROPS or SIPPs. However, that is nothing to do with passporting itself, just the national regulators.
Like everything, you have people making arguments one way or another about how pensions should be classified and this has led to MPs, such as Nicky Morgan who is chair of the Treasury select committee, writing a letter raising concerns about the matter to the Chancellor about Britain’s Brexit negotiations.
Several offshore expat financial adviser firms have been publically vocal (looking to promote transfers) stating that the abolition of passporting rights post-Brexit will result in insurers will not be able to continue to pay out to EU customers. Indeed they claim that providers paying pensions to expat customers without passporting rights, would be breaking the law.
If they are correct then some pensions for expats after Brexit take on a different concern!
Notwithstanding that Nicky Morgan has vehemently opposed both leave and also a “no deal” scenario, her political posturing and concern has been listed as a fact, which has then been used as scaremongering by opportunists who want to encourage the idea of transferring pensions so that they earn money from it.
They often quote what she wrote, “The possibility that UK providers may not be legally able to pay out pensions or insurance contracts to citizens in the EU – including UK expats – is a stark example of the consequences of a ‘cliff edge’ Brexit”.
Pensions for expats after Brexit – the Facts
To be clear, there is nothing illegal about an individual living in one country and receiving payments from another country. What would be illegal is the non-declaration of this income in their host country.
The whole point of Brexit is that the UK no longer falls under the rules of the EU, in the same way as the USA (for example) does not. Does anyone reasonably suggest that an American living in the EU cannot receive payments from an American provider, or that it is illegal?
Or is someone suggesting that an Australian living in the EU has to cut all ties with Australia as it would be illegal otherwise to receive income into the EU?
Therefore, it is wholly confused logic to equate the rules of passporting (which is the right to advise, market and sell cross border) which apply only in the EU to financial firms, with the ability for individuals to receive payments from outside the EU where passporting rules do not apply.
Conclusion = Pensions for expats after Brexit
As Nicky Morgan has subsequently accepted, it is likely to be in the interests of both sides to reach an agreement that will ensure the current system continues (whatever that system is, it is unlikely to be passporting). With the further unilateral statements and guarantees from the British government then state pensions and registered pension schemes are unaffected by Brexit as they simply do not come under the rules of MiFID, contrary to a lot of scaremongering.
If you’re a British expat living in the EU, you may be worried about the impact Brexit could leave on your life. That is completely understandable and there are real issues concerning “permanent Residency”, driving licences and the like. Pensions for expats after Brexit are not really one of the pressing matters unless you have a large fund in excess of £1 million or you are about to reach age 75. In these situations perhaps a QROPS should be considered.
Our Chartered Financial Planners keep abreast of all Brexit updates and will be able to offer you advice based on your individual circumstances. This is also a good time to review the underlying investments. Many UK pensions funds are predominately exposed to UK investment assets, and with the period of uncertainty ahead for the UK you should look to have wider diversification in your funds, with an investment strategy based on your risk profile.
We are independently regulated in France and the Czech Republic under both MiFID and IDD and hold licences and regulations in the United Kingdom and the United States. We have individuals qualified to Level 6 (Chartered or Certified) in all of these countries and we have branches in several other EU states focused on Cyprus, Ireland and Spain. We can assist you and provide the guidance you deserve, but we charge fees
End of article Pensions for expats after Brexit
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published on 21 August 2019
