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Page 10 We’ve all heard about Pension Freedoms, but what
do they really mean for expats living in Spain? By Sam Kelly, Managing Partner, Chorus Financial.
In 2006, as a direct result of EU legislation on Freedom of Capital Movement, the UK introduced legislation to enable expats to move both private and company pensions to overseas schemes. The potential benefits of doing this led to 100,000s of expats having more control over their pensions, consolidating multiple pensions into a single scheme, benefiting from penalty free, flexible access from as early as 55 in some cases which can allow for an increased inheritance for both their spouse and children. Further Pension Freedoms introduced in 2015 have now also seen the axing of a 55 per cent 'death tax' on pension pots left invested outside of the UK. The easiest way to explain how pension freedoms can benefit those looking to retire in Spain is to give you a typical scenario. Jane, our fictitious client, is 53 and lives in Spain with her husband. She has lived in Spain for over 5 years and has no plans to move back to the UK. Her 2 adult children live in the UK. Jane worked for a UK bank for 12 years and built up benefits in a Final Salary Pension Scheme. Her scheme Normal Retirement Date is 65, and she will be entitled to an annual pension of £8,500 per year on her 65th birthday. If Jane were to pass away, her husband would be entitled to a 50% spouses pension with nothing going to her children. Due to pension freedoms, she must have the option to leave her existing scheme and transfer to an HMRC recognised pension. This could be, for example, to a UK SIPP (Self- Invested Personal Pension) or a QROPS (Qualified Recognised Overseas Pension Scheme) depending on her personal circumstances and future requirements.
In order to decide if this is the right option, a fully regulated UK adviser will produce a report explaining to Jane what benefits may be reduced if she should transfer her pension, and any ramifications should she move back to the UK, helping her to make the best decision for her personal situation. The UK Pension Scheme must make a calculation from figures provided by the government to ascertain how much the client will be offered to leave the scheme. This number is called a Cash Equivalent Transfer Value (CETV). In this example, based on similar cases, the CETV could be £238,000. Jane now has the option to remain in her current scheme or to leave and open a private pension with a £238,000 balance. Rather than receiving her pension at age 65, or suffering a dramatically reduced pension to access early via her existing scheme, Jane has the option to access this £238,000 flexibly from her 55th birthday. When she passes away she can leave the full pension pot to her beneficiaries rather than her husband getting a 50% reduced annual pension and her children being entitled to nothing. Jane can also plan her withdrawals flexibly for increased tax efficiency: increase them when her income needs are higher, and reduce them when, for example, she reaches state retirement age and does not need to take as much from her private pension each month. The following chart illustrates how Jane could start drawing £12,000 per year from age 55 from her new pension pot of £238,000 and subject to growth of 4% per year after any fees,
Female Focus
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