Please see below the latest financial update from Blevins Franks, Please do not hesitate to contact Paul should you have any questions related to this or other financial matters.
Balancing the Chancellor’s books… could your UK pensions be affected?
By Paul Montague, Partner, Blevins Franks
The UK Chancellor Rishi Sunak, like his counterparts in Spain and the rest of Europe, has a difficult balancing act to find ways of raising revenue while still keeping public support strong for the government. And pensions and property are being brought into sharp focus in the media when it comes to the options he has available.
With the pandemic having caused the UK, Spanish and most other governments to provide huge financial support to keep their economies afloat, they now need to raise a lot of money over the coming years to pay what effectively is massive government debt – and taxation is one of the most obvious routes.
But what does that mean for you?
Well firstly, the changes that may be made by the government here in Spain could over time make tax-efficient investing more tricky, and capital taxes may become more encompassing. So careful planning with expert advice becomes even more important now to legitimately avoid paying any more tax than you have to.
It is not just Spain that you need to be aware of though.
If you are a UK national with a pension fund, property, or other assets back in the UK, they could be adversely hit by changes the UK government may bring in over the next year or two to start repaying the debts of the pandemic years.
Property in the UK
Property has already been targeted in terms of second homes in the UK and the council tax that is applied. And if you do have a second home in the UK rental income is taxable; selling it can attract capital gains tax as it is not your principal home, and of course stamp duty is set to return to its pre-reduction level.
You may want to hold onto a UK home for emotional reasons and as somewhere you could always move back to. Many people, however, are opting to downsize, so that if they retain a UK home it is a smaller one that they can easily nip back to at will, rather than need to rent it out to pay the bills.
Pensions ‘triple lock’
In terms of pensions, there has been much press speculation that the UK Chancellor may tinker with the ‘triple lock’. The UK state pension increases each year in line with the rising cost of living seen in the Consumer Prices Index (CPI) measure of inflation, increasing average wages, or 2.5% – whichever is the highest – hence why it is called the ‘triple lock’. Politically it would be a brave move for the Chancellor to dilute this measure, but it is an option and his remarks that he wants to see ‘fairness for pensioners and taxpayers’ has caused some to see this as an option being seriously examined.
UK expatriates in places like Australia and Canada no longer benefit from the triple lock as their state pension is frozen, whereas the Department for Work and Pensions (DWP) has confirmed that post-Brexit the UK government will still uprate the UK state pension paid to those living in the EU each year until March 2023. But as yet there is no confirmation of what will happen after that.
For those with established pension funds built over their working life, though, of equal concern may be the speculation that the lifetime allowance – which has been cut several times – may be further reduced.
This latter option is a way of bringing many more people and their pension funds (whether final salary or money purchase) into the higher taxation regime. The lifetime allowance is the maximum amount of tax-relieved pension savings that an individual can build up over their lifetime.
The standard lifetime allowance is £1,073,100 and tax relief on any pension benefits taken over this amount is recovered by the application of the lifetime allowance charge to the excess, which is charged at 25% if the excess is taken as a pension income or 55% if taken as a lump sum.
Although the lifetime allowance is currently £1,073,100, it normally rises in line with the Consumer Price Index – but in March this year the UK government announced it would be frozen for the next five years. And recent press speculation suggests that one option being considered is potentially cutting the lifetime allowance to £800,000 or £900,000. Do you know how much your pension fund is valued at? It may be worth checking.
Other factors to consider
But there is a silver lining to a degree, in that the Chancellor is expected to delay the autumn statement. According to the Guardian, the Chancellor is planning to hold a three-year spending review in the autumn but is thinking about delaying any tax measures until the spring to give the economy, business and workers more time to readjust.
With all of this speculation about pressure on UK government finances and the need to raise revenue, what does it mean for you?
Well on one level, not a lot. You live in Spain and pay tax here. But in terms of your UK assets such as property and pension funds, it could have a bearing on the future value of your assets, so it is definitely worth sitting down with your adviser and considering whether there are suitable options and alternatives open here you for your assets.
There are options you could consider here and it may be worth reviewing your position whilst the UK appears set to reappraise taxation now, albeit delaying changes until next year.
And here in Spain… UK pensions and Spanish wealth tax
British expatriates living in Spain also need to be aware of a 2019 local ruling which may mean their UK pension will be subject to wealth tax post Brexit.
Pension plans are generally listed as one of the assets exempt from wealth tax. However, although the current wording of wealth tax law does not distinguish between Spanish and foreign pension/EU and non-EU, plans, a ruling by Spain’s Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for the wealth tax exemption.
Binding ruling V1049-19 of May 16, 2019 states that: “the consolidated rights and economic rights of pension plans established in non-EU Members States may not benefit from the exemption”.
If you have a pension plan in the UK or any other non-EU state, you need to consider your options carefully as they are fully subject to wealth tax from the point at which the member can take benefits (currently age 55 for UK pensions). You essentially have a choice between:
- Retaining your UK pension and potentially having to defend the pension plan with the Spanish tax authorities, or
- Transfer your funds into a Spanish or EU pension plan, as an EU based Qualifying Recognised Overseas Pension Scheme (QROPS).
The UK’s 25% Overseas Transfer Charge
And with the UK’s Overseas Transfer Charge not having been extended yet – enabling suitable pension transfers to be made within the EU without the penal 25% tax being applied as it would for someone in other parts of the world – maybe now is a good time to review your position.
Nobody can know what the Chancellor will do until he announces it, but waiting for an official announcement may mean you miss the opportunity to take action under the current rules.
If you haven’t reviewed your financial affairs recently with your adviser, now may be an excellent time to do so.
At Blevins Franks, our pension specialists can carefully analyse all the available options and structure your pension arrangements to meet your particular needs and minimise taxes on your income and capital. They also provide a pensions consolidation service.
For more information and personalised advice, get in touch with Blevins Franks Canary Islands Partner, Paul Montague.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.