How could brexit effect your state pension?
UK resident pensioners receive annual inflationary increases to their state pension benefits in line with the triple lock – whichever is the highest of inflation, average earnings or 2.5 per cent. At present the 472,000 people who have retired to other EU countries are protected by EU law and continue to receive these increases. This however isn’t the case for everyone living overseas, pensioners in countries like Australia, New Zealand and Canada do not. That means payouts are stuck at the same level they were when a retiree moved abroad, or first began drawing their state pension if they were already overseas.
To be entitled to the annual increase you need to be resident in an EU or EEA country, or a country with which the UK has a social security agreement which includes a clause entitling recipients to an annual increase.
The UK does not currently have any bilateral agreements in place with EU countries, other than at a general EU level, so what will happen after Brexit? The most favourable outcome for EU expats would be if the UK could negotiate a reciprocal agreement with the EU as a whole. This may not be possible and the UK may be forced to negotiating with individual countries, with some unwilling to play ball. It is worth noting that the UK has not negotiated this type of agreement since 1981 due to the complexity and costs involved.
The legal framework and administrative processes are already in place to give the state pension annual increase to retirees living in an EU country. The Government has also adopted a positive approach to the entitlement of increases in times of change during the breaking up of Yugoslavia.
If however the government was under pressure to raise money following Brexit, it could potentially take steps to prevent those not contributing to the UK economy from receiving benefits like the annual rise in the state pension. Though this would have to be weighed against the estimated saving the Government considers it makes (i.e.£4,300 per annum) from pensioners living overseas not using the NHS and care services. If expats start moving back to the UK then increased health and benefit costs might outweigh any savings, but on the other hand anybody here would be paying taxes again.
Only time will tell, though comfort can be taken by the fact that recent history, coupled with an existing framework and the fact that the UK has six social security agreements in place which predate the EU (Republic of Ireland, France, Italy, Netherlands, Belgium & Luxembourg) suggests that the annual increase may well continue for those living in these countries if not the rest of the EU.
How Could Brexit affect your registered pension scheme?
Based on current law and practice, Brexit will have no impact on your pension schemes.
The UK pension freedom is solely a matter of UK law and so whether the UK is an EU member state or not is irrelevant.
Expats and overseas residents have been allowed to move their pension savings offshore under the ‘QROPS’ system since April 2006, but the Government could be free to severely restrict how offshore pensions are used following the Brexit vote. Although the core of the legislation can be traced back to an EU directive, 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.
Many people move to one European Union country but transfer their pension assets to another in order to minimise their tax bill. the Government might require that pensions can only be transferred to a country where an individual is resident following Brexit.
Restricting transfers would mean that more savers would leave their pensions in the UK leaving them potentially subject to income tax and possible lifetime allowance charges. There is also some speculation, that the UK could introduce a new ‘exit tax’ for pension transfers.
QROPS may be an option to protect your pension from any possible upheaval following Brexit. Another significant benefit of QROPS is that you are able to choose the currency.,meaning that you can invest your pension fund in the currency that you will ultimately spend. This could be particularly useful if Brexit negotiations result in a weaker Sterling and QROPS. Uncertainty in the UK economy and the possible impacts that this could have on markets would suggest that it is wise to have a more diversified portfolio. We have seen a raft of UK property funds suspending trading due to increased redemption requests demonstrating a lack of confidence in the longer term outlook.
QROPS are certainly going to feel the economic impacts of the UK’s decision to leave the European Union.
It is unlikely that there will be any significant changes until after Brexit has occurred. After Article 50 has been activated there will be an interim period of up to two years, whilst the exit is negotiated.This period is likely to result in an increase in demand for international pensions solutions such as QROPS, while people have some certainty over the rules and the treatment of their pensions.
As has always been the case the most suitable solution depends upon client circumstances and the regulatory climate at the time. The world changes as do the best solutions for an individuals circumstances, resist the “buy now or miss out” hysteria and make sure that you do what is best for you.
Since we wrote this there have been some significant developments mainly the chancellor announced a 25% tax charge on all QROPS transfers which essentially puts an end to them and with BREXIT looming this situation definitely won’t change (QROPS is an EU initiative and will likely be abandoned when the UK leaves).
From what we’ve seen so far the industry has lurched from QROPS back to Self Invested Personal Pensions (SIPP) in an attempt to keep the pension transfer gravy train moving. We’ve noticed companies start to promote International SIPPs though we’re not completely clear how they differ from QROPS if at all. It may be that consolidating your pensions is the best option for you and it is important that you do your research and make sure that you’re not going to be over burdened by fees.