According to The Times, around 72,000 expats over the last two years have left Spain and another 7,000 have left Italy. Around 300,000 Brits remain in Spain and another 65,000 are living in Italy, though not all of these are retired.With the Brexit vote to leave the European Union, many financial experts are predicting that the numbers of British expat retirees will begin to increase as people begin to fear for their futures and their worries over their pensions will see many make the move to ensure their savings are protected.
One reason for this is that the UK government currently raises the state pension for expats who have retired to a European Union member state – and several other countries – where there is a social security agreement for pension increases to be paid. There is no guarantee that pensions will rise in future which mean many expats will struggle to make ends meet.
British pensioners in the European Union
Under the government’s ‘triple lock agreement’, British pensioners who live in the European Union benefit from a minimum 2.5% increase in their state pension every year.
However, it’s not just the European Union referendum vote that’s prompting many retirees to return to the UK; many people who retired to another country often find their plans do not work out and want to return. Some people may be homesick, some will miss the culture and many miss their friendships.
Whatever the reason for British expats to return home, they all need to appreciate the impact on their pension and the plans they need to make before leaving their country.
Many UK expats will have made provision to transfer their pension into a Qualifying Recognised Overseas Pension Scheme, or Qrops, which is essentially a personal pension plan based with a provider in an international financial centre such as Gibraltar, Malta or the Isle of Man.
Moving a UK pension into a Qrops
Moving a UK pension into a Qrops is straightforward, but what happens when the expat decides that they must return home?
The one good thing about the move is that when Qrops were created, the UK authorities had built in this possibility occurring, so a British expat retiree can leave their Qrops where they are and be taxed on a basis that is similar to having a UK pension.
Having said that, some expat retirees would be best advised to transfer their pension into a UK-based solution, for instance a self-invested personal pension (SIPP) since it offers some cost efficiencies for some expats over their holding a Qrops.
Indeed, SIPPs are usually cheaper to set-up and run than a Qrops and for many expats they will be the sensible and cheaper option. The transfer process is straightforward, simply write to the Qrops’ trustees and request a transfer of the funds to a SIPP though the expat may be liable to exit fees.
The other issue a returning British expat retiree should consider is the tax implication if they have already begun making pension withdrawals from their Qrops while they were living overseas. They should also bear in mind that they may also be liable to pay tax in the Qrops’ jurisdiction.
Another issue that expat retirees and expats who haven’t yet retired may be wondering about is whether they are able to use pension freedom rules to access their Qrops when they return to the UK.
That’s because since April 2015, British pension savers have been allowed to access their pension savings from the age of 55 and they can withdraw all or part of it tax-free. However, under these rules they will not be able to access their Qrops simply because they have returned to the UK.
Also, if the time the expat spent overseas did not exceed five consecutive and complete UK tax years, then their stay is considered as temporary. If not, then specialist financial advice needs to be sought before the expat returns home and is hit with a potentially large tax bill.
HMRC must be informed
Remember, HM Revenue and Customs must be informed if the expat is returning back to the UK – whether it is going to be a permanent or temporary arrangement.
The rules over the expat moving to the UK will affect their tax liability on whether they are or will be considered ‘ordinarily resident’ or ‘resident’ for tax purposes in the UK. They will also be liable for paying tax on their overseas and UK incomes and may also be liable for a tax bill in the country they have left.
Indeed, the British taxman may decide to impose a retrospective tax bill since they may suspect someone is being less than honest about their stay overseas to build up a tax-free pension pot.
One way for the expat to avoid potential future headaches is to consider choosing a pension provider which offers a variety of solutions across multiple jurisdictions since this will deliver flexibility and enable the expat to transfer their pension trouble-free between jurisdictions.
Indeed, this last piece of advice underlines the fact that British citizens looking to retire overseas should plan ahead carefully and when doing so they also need to make plans for returning so they make the informed and correct decisions. It will pay to plan early and to plan for the unexpected.
While many expats will have a Qrops as their pension, a large number will also have a pension with an employer while they are working overseas and will be looking at bringing those funds into the UK.
For instance, an expat who has worked in the US and invested in a pension may want to move their money back to the UK for retirement purposes – and they will do very well since the pound has plunged in value against the dollar in recent months.
However, the US has strict rules about the moving of pension funds and for somebody who has a ‘deferred annuity scheme’ they could start receiving payments into a US bank account and will be taxed on this income. At current rates, an expat will receive around $70 for every $100 of pension income.
However, if they are living in the UK they should be able to claim a refund of some of this tax since they will be paying a tax rate of less than 30%. HMRC can offer more advice on this issue.
For those who do take their income from a US pension it will probably be paid in dollars. While this can be paid into a UK bank account every month, the amount received will fluctuate in relation to the shifts in the value of currency and the costs in transferring it.
Transferring a US pension
This may mean that an expat should consider transferring their US pension to the UK to avoid these fluctuations and costs and this advice also relates to other expats with overseas pension funds – it might also be a tax efficient way of structuring their financial affairs to mitigate the impact of inheritance tax.
In this instance they will need to undertake a ‘pension transfer’ which moves a pension pot into another location and it’s a fairly straightforward process, though the UK pension company will need to ensure that the retiree has taken steps to gain relevant financial advice before accepting the funds.
Having said that, US regulations are complex and finding an adviser who can help with advice on the US and UK pension systems will not be easy.
33% of British expat retirees planning to return
It should also be appreciated that the numbers of expatriates moving back to the UK could be significant, with research from NatWest Bank revealing that around one in three British pensioners who have retired overseas say they are planning on returning.
For 25% of them, the reality of their life overseas has not measured up to their expectations; many say they spent years dreaming of a sunnier climate to spend their retirement but their experience is far removed from what they believed it would be.
The research reveals that 33% of British expat retirees are planning to return and another 23% say the are considering returning at some point the future.
Among the reasons given for retirees to return to the UK, 97% said that the cost of living in their new country was much higher than they had anticipated.
NatWest says that it’s not just about the money, with 94% of expats confessing they missed their family and friends and three out of four admitting to missing British culture.
Of the countries that Brits are retiring to, Spain is the number one destination for those aged over 50 for 24% of respondents. That’s followed by North America with 22% and France is in third place for 20% of expats.
In addition, there are around 550,000 expats who are living on frozen state pensions; they do not receive annual increases unlike those who live in the European Union and some other countries.
This means that expats who’ve moved to Australia, Canada and India to retire are not receiving their full pension in the years after leaving the UK. Those who retired in 2000, for instance, receive £65.50 a week and that rate has remained the same rather than rising to the £155.65 first tier rate they would receive if they retired today.
For anyone thinking about returning to the UK and who is worried about their pension, they need to consider the following options.
1. Leave your pension alone. If it’s in a Qrops you will be taxed on the income. Some expats should consider a SIPP, whether they are still working or have retired.
2. Transfer your pension into a workplace pension. Expats who left the UK to work overseas without planning on returning may have had to return home because work dried up. For example, oil workers have found opportunities declining since the price of oil dropped substantially so their best advice is to transfer their Qrops into their new workplace pension. This option is only suitable for expats who are planning to continue working and want to preserve their pension.
3. Transfer the pension into a stakeholder pension or SIPP. While expat workers can transfer a Qrops into a new workplace pension, those who are planning to retire in the UK should look at a stakeholder pension, or SIPP. Both give the expat control over their pension pot though they may be liable to tax for the transferred amount. Expats need to tread warily because HMRC may decide that the expat had never planned to live overseas permanently and may decide to apply retrospective taxes for the money saved into a pension while working abroad. A financial adviser will be able to give more advice and the length of time spent abroad will be important.
Essentially, British expats looking to return to the UK for their retirement or who want to move their pension fund home will need to plan carefully so they receive an income from their pension without damaging their pension pot’s value in tax and transfer fees.
In order to plan ahead, it would be worthwhile speaking with an FCA-regulated financial adviser who will be able to help on transferring pensions, whether the expat is in a Qrops or otherwise.
HMRC offers useful help and advice for returning expat retirees with advice on their website and also a call centre: from the UK it’s 0300 200 3300 and from outside the UK the number is +44 135 535 9022.
The Department for Work and Pensions also offers advice on transferring a pension back to the UK.
Age UK publishes a helpful document on returning to the UK and issues that expats should consider.