Mixed Pension Fortunes for British Expats

The revision of the UK State pension benefit age to 66 by possibly as early as 2016 should be factored into the financial plans of all those considering to retire abroad, with Qualified Recognised Overseas Pension Schemes (QROPS) remaining a real option for those looking to pass on wealth, not wanting to commit to an annuity as well as those who are looking to shake off their UK domicile, according to Rex Cowley of Close International. Commenting on the UK Government’s 2010 Emergency Budget, Cowley said: “In addition, the reality of the State pension benefit age being pushed out to 70 years of age in the following decade asks significant questions as to how individuals that wish to retire earlier are to fund their retirement.”

In particular, British expat pensioners who were already over the age of 75 as at 22 June 2010 and have not secured a pension income can still be subject to combined IHT and tax charges of to up to 82% on death, which means a transfer to a QROPS remains a very strong consideration as these schemes are not subject to UK IHT, special lump sum death benefit charges or unauthorised payment charges when distributing their assets on the death of the member. “This makes them a real option for passing on 100% of any remaining wealth within a pension to beneficiaries. However, wealth or inheritance taxes may apply to distributions in the countries where the member resides and this should be considered carefully,” notes Cowley.

British expats keeping their pension in the UK, however, will most likely see tax rates fall on death but tax rise on income, which is contrary to almost everything else in the budget, says Cowley.

Cowley noted that no change to the QROPS rules and the announcement that the Government will end the effective requirement for members of registered pension schemes to purchase an annuity by age 75 with effect from 2011 - 2012 are positive.

As an interim measure, members of registered pension schemes, who reach the age of 75 on or after the 22 June 2010, won’t have to buy an annuity or otherwise secure a pension income until after they reach 77. This will enable all such members to defer their decision on what to do with their pension savings until new rules are finalised during 2011.

“This is particularly good news as it will give all British Expat pensioners, who opt to keep their pension in the UK, the opportunity to plan for the next stage of their retirement without having to make blind decisions; which could later prove very detrimental,” says Cowley.

Importantly, this interim measure provides a degree of IHT protection to qualifying pensioners as the total tax charge at death between the age of 75 and 77 will now be 35% as opposed to a current possible highest rate of tax of 82% with the remaining assets being transferred to their beneficiaries.

However, changing the link between the annual increase of the UK state pension and the Retail Price Index (RPI) to the Consumer Price Index (CPI) is controversial as historically RPI has typically exceeded CPI. This means that pensioners have been financially better off over the past 10 years because of RPI being higher than CPI. Currently RPI stands at 5% where as CPI is 3.2%. Over a 10 to 15 year period a difference in compound returns of 1% to 2% percentage point per annum can make a considerable difference to earnings, according to Cowley. Hence this amendment to the measure of inflation and indexation will likely leave all pensioners with lower annual increases in their state pension benefit.

Lastly, the budget was unsurprisingly silent on the inequality of indexation of state pension benefit for those Brits that live abroad. Some benefiting from annual increases whilst others not, irrespective of the level or duration of contribution to the social security system in the UK.