One area of concern for British expatriates living in Europe is how the UK’s decision to leave the European Union (EU) will affect their pensions.
As with issues like residency and healthcare, the rights you have now will remain in place until the UK officially leaves the EU, a process that will take at least two years from the activation of Article 50. This gives you time to consider your options.
How could Brexit affect your state pension?
UK residents receive annual inflationary increases to their state pension benefits. Expatriates living in the EU are protected by law and continue to receive these increases, but those resident outside the EU in countries like Australia, New Zealand and Canada do not.
To benefit from the annual increase you need to be resident in an EU/EEA country, Switzerland, or a country with which the UK has a social security agreement including a clause entitling recipients to an annual increase.
The legal framework and administrative processes are already in place domestically if the UK was to decide, post-Brexit, that UK retirees living in the EU would benefit from state pension annual increases.
The UK has proved willing in the past to grant state pension increases in times of change, for example during the breakup of Yugoslavia. However, this did not result in any real additional costs to the Exchequer – which would be the case if it was granted to UK expats in Australia for example.
Future state pension increases for EU-based UK expats will have already been factored into the UK’s future spending plans, but whether the government chooses to include it as part of its Brexit negotiations will depend upon how trade negotiations develop and the state of the UK economy.
How could Brexit affect your registered pension scheme?
Based on current law and practice, Brexit will have no impact on your pension scheme(s). UK pension freedoms are solely a matter of UK law and so whether the UK is an EU member state is irrelevant. Similarly, overseas pensions are not discriminated against under the law of most EU states. Neither this nor the taxation of pension benefits should change with Brexit.
Many UK expatriates have transferred pension capital from a UK registered pension scheme to a Qualifying Recognised Overseas Pensions Schemes (QROPS), and the UK has a long history of permitting transfers to bona fide overseas pension schemes. QROPS are a function of UK law and can be based in both EU and non-EU countries so Brexit is unlikely to have any impact in this area.
There has been speculation the UK could introduce a new ‘exit tax’ for pension transfers. With all the pension legislation amendments over the years, further changes would not be a surprise.
What can I do to protect my pension?
If you are planning on retiring overseas, you have a defined contribution scheme, and you are concerned about future UK pension reforms, you could transfer your pension funds to a QROPS. UK self-invested personal pensions and QROPS have a similar structure; you can continue with your current benefits but in a potentially future-proof QROPS. This scheme is outside of UK pension regulation, and therefore not subject to the ramifications of future legislative change.
Another significant benefit of QROPS is that you are able to choose the currency in which you receive your pension. Brexit has so far resulted in weaker Sterling, and QROPS would allow you to move into Euros – the base currency for your living expenses in the EU.
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 might consider a wider diversification in funds as a hedge against the risk of a downturn in the UK.
As always, the best approach for your pension funds depends on your individual and family circumstances and objectives. It is important to take personalised and regulated advice, ideally from a locally based firm which specialises in advising expatriates, to explore all your options and determine the most suitable solution for you.
Jason Porter is a director at Blevins Franks Financial Management
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