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Brexit – the pensions impact

Brexit – the pensions impact

Individuals leaving the UK for the EU should consider the pension implications

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Brexit, in general, makes the cross-border provision of goods and services more challenging. Strangely, however, the UK tax treatment of cross-border pension contributions and distributions has never been particularly ‘EU friendly’. 

What could change with Brexit?

UK domestic law confers few special advantages on pension plans located in EU countries - and the UK’s network of double tax treaties (DTTs) give UK tax relief on cross-border contributions only in a handful of cases, with no EU bias (e.g. the treaties with France and the Netherlands  – and with non-EU USA and Canada – provide for such relief, but not those with  Germany or Spain).

Paradoxically, Brexit could ease up pension restrictions, as UK legislation (reflecting old EU requirements) currently imposes many restrictions on EU cross-border pension plans (e.g. a requirement to comply with each relevant country’s social and labour law and to fully fund defined benefit plans). There may now be a move to loosen these restrictions.

What are the issues to consider?

However, individuals who leave the UK as a result of Brexit need to consider the tax treatment of continued contributions to their old UK pension schemes and of transfers out of such schemes to EU based pension plans. It is not yet clear just how many individuals will be so affected (or, indeed, how many UK pension schemes will accept continued contributions from non-UK residents). Points to consider include:

  1. the local tax treatment of contributions and the possibility of continued UK relief (the UK has some strange rules whereby a recently departed individual can, in certain circumstances, obtain limited UK tax relief even where he/she is completely outside the UK tax net);
  2. the continued application of the annual allowance testing rules to contributions;
  3. the potential eligibility of individuals to apply to HMRC for an ’international enhancement’ to their pensions lifetime allowance (UK pension scheme benefits above this limit being subject to penal tax charges) – although the rules are strict and various factors (e.g. remuneration referable to a UK business trip that is subject to UK income tax) could invalidate eligibility;
  4. the potential (local and UK) tax treatment of distributions from such schemes – an applicable DTT may remove the UK’s taxing rights in some, but not all, cases; and 
  5. the complicated UK rules on transfers from UK pension schemes to qualifying recognised overseas pension schemes (QROPSs) – such transfers and/or future QROPS distributions can trigger UK tax charges. Of particular concern is the new overseas transfer charge (OTC), which can sometimes be imposed either when the transfer is made or if the individual subsequently leaves the EU (although, as the UK is effectively still treated as part of the EU for this purpose, the OTC should not be triggered by a return to the UK). This element of retrospectivity means the OTC presents particular risks.

There will also be potential UK tax issues to consider even where individuals only contributed to non-UK pension plans whilst in the UK - as future distributions from these plans may, depending on the circumstances, trigger either income tax or special penal UK tax charges.    

So, whilst Brexit may ultimately have a positive impact on cross-border pension provision, ’Brexit exodus’ individuals are going to have some very important pensions tax issues to consider.  

How KPMG can help

We provide tax advice for employers and individuals including on:

  1. The treatment of UK pensions when relocating out of the UK;
  2. Asset transfers from UK to non-UK pension schemes;
  3. Distributions from UK and international pension plans (including our Pension Distributions Analyser);
  4. Establishing and monitoring a governance framework for international pension schemes.

If you’d like to discuss these issues, or how KPMG can assist you, please contact Rhys Thomas, your normal KPMG contact, or email employersclub@kpmg.co.uk

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