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28 Nov 2020

Living abroad after Brexit: is your UK pension secure?

Expats may lose some of their pension rights after the transition period ends

British expats retiring in the EU still don't have much clarity on how their pensions will be impacted if no deal is reached before the Brexit transition period ends on 31 December.

Experts are warning that in a matter of weeks it may become impossible for UK-based pensions to be counted as part of an EU-based divorce settlement.

While there are still question marks over whether those moving to EU countries in 2021 will see their state pension payments frozen and whether the UK will keep its 'passporting' rights that allow expat pension benefits to be paid into a UK bank account and enables UK-based pension providers to offer their services across the EU.

Here, Which? Takes a closer look at the key issues, and provides actions you could take to protect your retirement savings.

You can navigate this story by clicking on the links below:

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How will Brexit affect my pension if I get divorced in the EU?

One key consideration in divorce settlements is what to do with pensions - in many cases - one of the largest assets built during marriage.

Under current rules when a couple gets divorced their pensions are usually included in the financial settlement along with property and other assets, provided they reside in the UK.

The total value of the pensions you have each built up is taken into account in England, Wales and Northern Ireland.In Scotland, it only applies to the pension you built up while you were married.

However, from January 2021 spouses may not be able to include their ex's pension as part of the divorce assetsif they're no longer UK residents.

As it stands, English and Welsh courts cangenerally hear financial cases after an overseas divorce as long as one of the parties is domiciled or a UK resident, or there is a matrimonial home in the UK in which at least one party has a beneficial interest in. If these criteria can't be met there's an EU rule that means cases can be heard in a member state.

This is called 'the forum of necessity' which means that where no other EU country has clear jurisdiction, a case can be heard in any of the EU member states as long as there's enough of a connection to that country.

For example, if one or both of the spouses previously lived there, the provision can be used to bring an application for an English pension-sharing order for that pension.

However, after the transition period ends, this 'forum of necessity' rule will no longer apply to the UK, unless a deal is agreed.

Expert comment: why you should take action now

Senior associate at London-based law firm Kinglsey Napley Stacey Nevin told Which?: 'For anyone who is in that position now, they should think about bringing an application before the end of the Transition Period (and the sooner the better), while the 'forum necessitatis' [forum of necessity] route is still available.

'For anyone in this situation after the end of the Transition Period, the position is very unsatisfactory. This may be a point for future law reform, but as matters stand, there is no replacement proposed for our domestic law and this is unlikely to be resolved before the end of the Transition Period.'

Scotland and Northern Ireland have their own domestic legislation so rules may differ slightly. If you're unsure about the rules talk to a family lawyer based in the region you're from or contact your local Citizens Advice bureau.

What are the pension rules for those who live abroad?

The current rules generally allow you to claim and pay into your pension anywhere in the world provided you meet all the qualifying criteria.

However, there may be some limits to this which we've outlined below, as well as potential changes due to Brexit.

State pension

If you qualify for state pension payments, you can claim it anywhere in the world.

You'll need to have made National Insurance Contributions (NICs) for a minimum of 10 years to get any state pension - whether you get the basic or new state pension.

You can still build up a UK state pension if you pay into the social security system of:

  • The European Economic Area (EEA) and Switzerland;
  • Countries that have a social security agreement with the UK, such as the USA, Turkey and Gibraltar.

Here's an example of how this could work:

However, on and after 1 January 2021 you may no longer be able to build social security contributions for state pensions in any of these countries. This depends on the outcome of negotiations.

If you move to any of these countries before retirement and work there for a number of years, it may be possible to receive the state pension from more than one country. This might change after 31 December.

The 'triple lock'

Your state pension will still be uprated every year in line with the 'triple lock' for the same states as above, even when the transition period ends, the government has confirmed.

This means that, if you already live in any of those countries, it will rise each year by whatever is the highest of average earnings, inflation, or 2.5%.

However, those moving to any EU countries after 2020 might see pension payments frozen unless a post-Brexit deal is struck.

Defined contribution pensions

Just because you live in an EU country doesn't mean you'll lose access to your defined contribution (DC) pension. Schemes currently pay pensions to members around the world - whether they've retired in the EU or outside it.

You may be able to pay into a DC scheme if you live abroad, depending on your scheme's rules. Although, after the transition period ends, this could end depending on what happens to passporting rules. In other words, your scheme may no longer be able to offer its services to you if you live abroad.

Even if you can pay into a UK pension while living abroad, you might not qualify for tax relief on your contributions. To get this, you must have been a UK individual for tax purposes for the tax year in question. For example, having relevant UK earnings and paying UK income tax during that tax year.

Defined benefit pensions

If you have a final salary or defined benefit (DB) pension - at retirement you should get your promised payout on an income wherever you live based on how much you earn when you retire. Unlike DC pensions, the amount you'll get at retirement is usually guaranteed.

Can expats get paid pensions into a UK bank account after 2020?

Currently, you can get your state and personal pensions paid into your UK bank account even if you live in the EEA, under passporting rules.

However, once the Brexit transition period ends this may no longer be the case unless a specific agreement to carry it on is reached as part of a Brexit deal.

With no such deal confirmed, UK banks are left trying to fulfil and negotiate the stipulations from every EEA country's regulators. All of them work differently and will be more feasible for some banks than others.

Thousands of UK expats living in the EU have already received letters from their UK bank to say their bank accounts and credit cards will be closed as a result of Brexit.

So, unless a deal is reached soon, expats who live abroad may no longer be able to receive their pension benefits into their UK bank.

Can expats get pensions paid into an overseas account?

You can get your pension paid into an overseas account, but it will present additional costs to pension providers which may be passed on to you, alongside charges imposed by the receiving bank.

For example, you may have to post documentation of new bank details which could cause delays, and your pension provider could charge you to move your money across.

PensionBee chief executive Romi Savova says: 'Pension providers must work quickly to adapt their systems and provide cost-effective solutions for their customers, in order to avoid leaving overseas pensioners in limbo without access to their retirement savings.

'In the meantime, we urge pensioners living abroad to plan ahead and ensure they have sufficient funds in place to cover their living expenses for several months. Expats already withdrawing from their pensions should investigate whether receiving pension payments from the UK will have tax implications in their country of residence, and may wish to seek advice from a local tax adviser.'

Pension income is normally taxed in your country of residence.Income tax rates vary considerably around the world. Most countries allow you to keep an initial sum tax-free and then charge tax at escalating rates, depending on which band your income falls into.

Transferring UK pension savings to an overseas scheme

If you're worried about charges and delays to your pension, you could consider moving your personal pension to the country you live in.

If you want to simplify your affairs, you can transfer to a 'qualifying recognised overseas pension scheme' or QROPS - a scheme recognised by HMRC that allows it to receive funds from a UK pension.

A full list of these schemes can be found on the government's website.

You must check this, otherwise, your UK scheme may refuse the transfer or you could face hefty tax penalties.

We've outlined some of the pros and cons in the table below:

You can consolidate your pensions under a tax-efficient roof; once in a QROPS, your funds are sheltered from UK tax on your income and gains.You may not have the same benefits you'd have in your UK DC scheme if you choose to transfer.
You'll usually be able to enjoy multi-currency flexibility meaning you can hold and draw your money in a currency of your choice.Transferring your pension could change the amount you get when you retire. Check with your provider.
In the UK many pensions are only payable to your partner when you die. But in a QROPS, you can include them in your estate planning.You could have less choice about what you can do with your pension pot than if you left it in the UK. You may also have to pay more charges.

Can I move a DB pension into a QROPS?

Transferring your DB pension abroad can be quite complicated. You can't transfer the pension itself into a QROPS; only the actual value of what the retirement fund is, or a 'cash value'. This is commonly referred to as a DB transfer.

Remember if you transfer out of your DB pension you lose the guaranteed income element and any safe-guarded benefits included in your policy.

By law, you have to get regulated financial advice if your DB pension is worth over £30,000. If you live in an EEA country and need advice from a UK financial adviser, they'll need legal approval to give you advice in your country under passporting rules. Check what passport(s) your firm currently has on theFinancial Services Register.

Whether or not, and how many, UK-based advisers will be allowed to provide advice to someone who is resident in the EU isn't clear if the UK loses its passporting rights.

If you proceed with a transfer, you'll have to fill in a 'letter of authority' to your IFA so they can get your current pension value - or your 'Cash Equivalent Transfer Value'. Your scheme can convert the benefits into a cash lump sum. You can then invest your money in a scheme of your choosing such as a QROPS or a self-invested personal pension (SIPP) in the country you reside in.

Tax implications for transferring your pension abroad

Usually, most expats in the EEA can transfer a DC scheme to a QROPS tax-free.

However, you may have to pay tax if your UK pension benefits exceed the lifetime allowance. This is currently set at £1.073m. If you go over this you'll face a 25% penalty on anything you transfer over this limit. Although, once you're in the new scheme you won't be subject to UK lifetime allowance rules.

Under current rules, transferring to a QROPS outside the EEA will trigger a 25% UK 'overseas transfer charge'.

It's not clear whether the tax-free element will continue for EEA residents after the transition period ends.

Where to find help with UK pensions if you live overseas

Moving your pensions abroad can be quite complicated and whether or not you should do it depends on your individual circumstances.

You're best off speaking to a financial adviser before making big decisions like this, especially if you've built most of your pension in the UK. But you will be charged a fee to do this.

Alternatively, you can contact The Pensions Advisory Service,which can give you free and impartial information on how to take your pension abroad, or the International Pension Centre which can help you with your state pension abroad.