QROPS After Brexit – 25% Exit Tax if You Transfer Your Pension to EU?

QROPS Post Brexit – Exit Tax Issues

QROPS and Brexit. Can you transfer a UK pension to the EU after Brexit? Will there be a tax on a UK pension transferred to the EU after Brexit? Can someone in the EU access their UK pension scheme after Brexit?

There have been two very interesting posts in the Financial times over the last week on September 13th and September 14th. Obviously, with Brexit on the horizon with the actual date of the UK leaving the EU scheduled for March 2019, but likely postponed until December 2020, it is becoming increasingly important for expats and potential expats to re-examine their retirement portfolio set up.

With it looking more and more like a hard Brexit on the doorstep, it is important to try to make sense of what to do with your retirement benefits and make a decision of where you wish to live after Brexit and how taxes might affect your pension plans.

Why Did HMRC Introduce the 25% Exit Tax?

According to HMRC, it was to avoid tax abuses. But, people moving to Australia or New Zealand get an unfair advantage by paying no tax on their pension at retirement. Neither Australia or NZ tax you on retirement benefits received.

If you move to Portugal, you can move your pension to a third country in Malta and only pay Portugese income tax, which is zero for the first 10 years if you become a Non-Habitual Resident, but if you move to Asia, for example, you could be paying both UK income tax and tax in your country of residence in Asia, plus a tax on death despite not living in the UK.

HMRC have skewered the rules in a fashion which makes sense to HMRC, but not many others. QROPS is not a viable option unless you are moving to Australia, New Zealand, India or Europe due to the punitive 25% tax on exit. You can see more here on the history of QROPS and its timeline from 2006 – 2018.

Will There Be a 25% Exit Tax in Europe?

What will happen when Britain leaves Europe? Will there be an exit tax? This has been a question for many pensioners, as well as whether they will face a tax on their European pensions or QROPS if they ever settle back in the UK. Well, no-one knows the answer, but there have been clues from the Treasury.

Exit Tax on UK Pension Transfers Post Brexit

First, let’s get delve into the articles from the Financial Times.

In his answer to a written question from Labour MP for Bristol West, Thangam Debbonaire, the economic secretary to the Treasury, John Glen, stated the tax status of [transfers to QROPS] would depend on the Brexit deal achieved.

He wrote: “The regulations that allow a tax-free transfer of a private pension scheme to a Qrop within the EEA are domestic law which currently comply with EU fundamental freedoms.

“Whether or not these transfers will be exempt from the overseas transfer charge once the UK leaves the EU is dependent upon the terms of future exit agreement between the UK Government and the EU.”

In March 2017, a 25% exit tax on transfers to QROPS outside of the EEA was introduced by then-chancellor of the exchequer Philip Hammond to deter individuals from moving their pensions overseas to avoid tax.

As mentioned before, this has penalised people who are moving to USA, Canada, Switzerland, Africa, Asia, the Middle East and Latin America who do not have any local QROPS options.

The 25% exit charge applies unless both the individual and the Qrops are in the same country after the transfer, or the Qrops is in one country in the European Economic Area (EEA) and the individual is resident in another EEA after the transfer.

In other words, if you are moving to Europe, you can transfer your pension to a QROPS in Malta and usually, you will only pay tax in your country of residence in Europe, for example, Portugal. Currently, many British expats are moving to Portugal, Australia and New Zealand in order to pay 0% income tax on their pensions. HMRC have skewered the results of where expats are deciding to retire abroad.

Since the 25% exit tax, QROPS transfers have dropped by a half.

An overseas pension transfer charge to Europe would kill off what little there is left of the QROPS market. But, if you look a the timeline of QROPS transfers, you can see where this is likely going. HMRC want you to spend money in the UK, taxed in the UK.

Will You Even Be Able to Transfer a UK Pension to a QROPS in the EU (Malta) After Brexit?

The Financial Times continues…

In a written answer to Parliament, Guy Opperman, minister for pensions and financial inclusion, said the current rights of citizen in transferring their pensions to overseas pension schemes will be maintained, even under a no deal Brexit.

He said: “The UK and EU have already agreed the terms of an implementation period lasting until the end of 2020.

“During this implementation period, access to one another’s markets will remain unchanged and on the current terms, ensuring continuity for consumers and businesses.”

After Brexit, he said, “whether they are a UK citizen or a non-UK EU citizen, they will continue to be able to transfer their pensions to overseas pension schemes.

“Equally, UK pension schemes will continue to be able to receive transfers from overseas pension schemes.”

However, the conditions cannot be guaranteed. In other words, there could be an exit tax and if it is similar to other countries, that will be a 25% exit tax on transferring to the EU. That would keep it “fair” in the mind of HMRC and deter workers from retiring abroad, keeping money in the UK. 

Note: this is my opinion only and in no way reflects the opinion or position of HMRC.

Will I Be Able to Access My UK Pension in Europe After Brexit?

I would guess they will come to an agreement on this, but again it is not a foregone conclusion.

The FT has an article in August, where the government confirmed that about 220,000 UK citizens aged 65 plus living in the EEA could lose access to their UK pension schemes in a no-deal Brexit situation.

It said British expats “may lose the ability to access existing lending and deposit services, insurance contracts (such as a life insurance contract and annuities) due to UK firms losing their rights to passport into the EEA, affecting the ability of their EEA customers to continue accessing their services”.

According to figures from the Office for National Statistics (ONS), there are 900,000 Brits currently living in the EU, of which 220,000 are aged 65 plus.

A transfer out of a UK pension scheme into a Malta QROPS before Brexit would guarantee your pension is held under EU law.