Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
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Ask the experts. Rachel Vahey is here to answer questions on pensions. If you'd like a question considered for a future edition, send it in now.
Three years ago, we bought property in Spain, and since our retirement last year, my husband and I are currently dividing our time between the UK and Spain. However, this is a temporary arrangement, and we want to move out there permanently in the next two to three years.
We know this is a big move, and have been speaking to different tax advisers about the consequences for our finances
I took my tax-free cash from my main work private sector defined benefit pension scheme last year and started to take an income from the pension scheme. I also have a SIPP that I haven’t touched yet.
What should I be thinking about when working out how and when I could access my SIPP?
Thanks
Alison
Rachel Vahey, AJ Bell Head of Public Policy, says:
Moving permanently to Spain will, as you have already identified, have a massive effect on your personal finances, and you are right to be approaching this change by getting the right information and advice you need at this difficult time.
Becoming tax resident in another country is a fiendishly complicated process. You should be talking about your whole range of financial concerns to a professional adviser who has experience with both UK and overseas tax law and other matters and can help you through this process.
What will it mean for your pension specifically?
As part of this information gathering process, you will need to think about implications for your pensions. You are already receiving a pension from your defined benefit scheme. They will continue to pay this, but most schemes will want to pay in UK sterling into a UK bank account. It may be worth asking the scheme if they would be prepared to pay into an overseas bank account. Either way, you will have to bear the risk and cost of converting the sterling into euros.
If you want to take an income from your SIPP, then it’s likely the provider will want to pay it into a UK bank account, but again you should check their position.
In both situations, usually, the pension scheme deducts any UK income tax before paying out the pension income. However, if you become resident overseas for tax purposes, the taxation of the payment will be determined by the double taxation agreement in force between the two countries.
You should complete a DT-Individual form to arrange the correct taxation. In some situations, this may mean your pension scheme pays the income gross and it’s taxed in the country of residence. You will need to make sure you fill in the correct HMRC form – P85 – and that this results in an NT code being issued to your pension providers.
An alternative is to transfer your SIPP to a provider that offers more options to overseas residents; whether that is regarding payment or managing funds while you are not in the UK.
What is a QROPS and why is it relevant?
In theory, you may also be able to transfer your SIPP to a Qualifying Recognised Overseas Pension Scheme (QROPS). This is an overseas pension scheme that operates in a similar way to UK schemes and is registered with HMRC. Transfers to a QROPS could be subject to an ‘Overseas Tax Charge’ of 25% of the transfer value.
However, you might be able to avoid this if the QROPS is based in the same country as you are. Unfortunately, there is only one Spanish scheme which is registered with HMRC so this may not be an option for you. Generally, if someone is thinking about using a QROPS then before they transfer they should check how the QROPS works – the features it offers, and the charges involved.
You say you have not yet accessed your SIPP. You therefore have a choice whether to access it here or when you are resident overseas. If you access it when you are non-resident then be aware that generally many overseas territories don’t recognise pension tax-free payments, and you may lose the advantage of your tax-free cash. If that’s the case, it will make more sense to take your tax-free cash before you move.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
