This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser or financial planner such as ours here at Shorts in Sheffield and Chesterfield.
On 31st December 2020, the UK and the EU finally reached a deal over Brexit. But there are still several points of uncertainty, with few people fully understanding how the deal will affect important areas of their lives.
Pensions are one area of confusion, as while the UK is responsible for its own pension legislation, there could be implications for pension funds which invest overseas. You may also be wondering what would happen to your pension if you moved abroad.
In this guide we look at the main areas in which Brexit could affect your pension if you are a UK resident.
UK pension rules are set by the UK government, and won’t significantly change as a result of Brexit. For example:
- You will still be able to contribute to your pension and receive tax relief.
- Contributions will continue to be limited by earnings and the Annual Allowance.
- The minimum retirement age will stay at 55 until 2028, when it will rise to 57. Thereafter it will remain at ten years below State Pension age.
- You can still draw your pension income flexibly, including a 25% tax-free lump sum.
- Your pension can still move between different providers if you decide that another company can provide you with a better deal.
- If you are an eligible employee, your employer will be obliged to offer you a workplace pension and will need to continue making contributions for you.
Of course, pension legislation is known for frequent changes, so we cannot say with certainty that everything will remain the same indefinitely. However, the impact of Brexit is expected to be minimal.
For several years, it has been possible to transfer your pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) outside the UK. It was often seen as an attractive option to reduce tax or take benefits earlier, even if there was no intention of moving abroad.
Loopholes were quickly closed, meaning that most of the benefits of a QROPS were removed for typical investors. Heavy tax penalties could apply for using QROPS to get around HMRC pension rules.
In 2017 a 25% Overseas Transfer Tax was introduced where UK pensions were transferred abroad. The two exceptions were:
- Where the member had moved to the country receiving the transfer
- Where the member lived in the European Economic Area (EEA) and the pension was transferred to another EEA country.
If these conditions applied, the tax could still be charged at a later date if the member relocated and the above criteria was no longer met.
This, of course, raises questions as to whether these exceptions remain in place now that we have left the EU.
Currently, the exemptions are still available, but there is no guarantee that this will continue.
If you are considering a transfer to an overseas pension, it is vital that you seek advice, preferably at home and abroad.
Your State Pension
You should not expect any changes to your State Pension if you are a UK resident.
If you live in, or move to, an EU country, you will still receive your UK State Pension with full annual increases. This is not unique to the EU, and depends on the terms negotiated with each country.
Similarly, you can also build up a social security record abroad which can contribute towards your UK State Pension if you later return.
You can find out more here.
What if You Move Abroad?
If you move abroad, it is likely that your UK pension can continue to be paid in your new country of residence. Your pension provider should contact you if they need to make any changes, but most companies have made preparations for Brexit by this point.
Now that freedom of movement has been removed, the possibility of moving to the EU becomes a much bigger decision. It is still an option, but the transition is unlikely to be seamless.
Before considering a move, you will need to think about:
- How long you want to stay and securing residency status for yourself and your family.
- Whether you are eligible to receive healthcare.
- Your options for working or studying abroad.
- The implications of owning property.
- Access to banking and other services.
- Wills and powers of attorney.
As each country is different, you should approach a move in the same way as if you were thinking about relocating to Australia or the US.
Move information is available from the government’s Living in Europe Guide.
The majority of pensions are fully covered, with no upper limit, by the Financial Services Compensation Scheme (FSCS), as long as they are provided by UK-regulated insurers. Certain Self-Invested Personal Pensions (SIPPs) may be excluded from this, and the protection would depend on the underlying investments or the advice that was given.
Currently, investments are protected up to a level of £85,000 per investor, per firm. This is available subject to the following conditions:
- The company and the product or service must be regulated by the Financial Conduct Authority or the Prudential Regulation Authority.
- The firm is insolvent and cannot meet your compensation claim.
- Your claim must relate to negligence (for example, poor advice) and have resulted in a tangible loss.
- Poor investment performance is not covered, providing the risks were clear.
Certain funds which are domiciled in the EU may no longer be eligible for this protection. Any compensation claims in respect of the funds would be dealt with locally under the country’s own rules.
Of course, if the advice to invest was given by a UK authorised firm, your claim could still be covered by the FSCS providing the above conditions were met.
You can find out more on the FSCS website.
Like any major global event, it is likely that Brexit will have an impact on the stock market. With the deal now passed, we could now be over the most volatile period. But there are still many uncertainties, and there could more subtle long-term effects.
As pension funds invest in the stock market, any event that causes valuations to fluctuate will affect your pension fund. However, this does not only apply to Brexit. At any given time, there are multiple global influences which are all competing for the stock market’s attention. Prices can be pushed in both directions, several times a day.
Any of the following could be affected, with a resulting impact on your investments:
- Share prices could rise or fall depending on the perception of certain companies and how profitable they are.
Currency fluctuations can either increase or decrease the value of assets held abroad.
- This can also make it more or less favourable for countries to trade with each other, which in turn, can affect share prices.
- High inflation means that the cost of living is rising more quickly than expected. Investments need to work even harder to keep up and retain their purchasing power.
- Fluctuating interest rates will affect how much people save, invest, spend, or borrow, which will have a resulting impact on businesses and the economy in general. For example, the current low interest rate was intended to stimulate the economy by encouraging more people to spend, borrow and invest.
The global economy is fast-moving and intricately connected. Trying to account for all of these factors and judge investments accordingly is usually a futile exercise. It is far more efficient (and less stressful) to have a consistent strategy that works in all stages of the economic cycle.
What Should You Do?
Here are our top tips for Brexit-proofing your pension:
- Plan carefully if you decide to move abroad, and seek advice where possible.
- Make sure your National Insurance Contributions are up to date so that you receive a full State Pension.
- Think twice before transferring your pension abroad and always obtain specialist advice. Never attempt to circumvent HMRC regulations by moving money overseas as this will probably result in heavy tax penalties.
- Diversify your investments across a wide range of asset types and geographical locations. This helps to reduce the impact of any one event and spreads your risk.
- Avoid drawing on your pension early if you have other options. Pensions are highly tax-efficient and should be held for the long-term.
- Check the investor protections available if you lose money through negligence or fraud and the company responsible cannot afford to compensate you.
Please don’t hesitate to contact a member of the team to find out more about retirement planning. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
The information contained in document and/or website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.