For the last year we have been analysing the true impact of Brexit on British pensions’ advice within the European Union, and indeed questioned the orthodoxy of British pensions being transferred to Malta and Maltese Trustees for UK and European Union (EU) residents.
Regulation, different country setups and double tax treaties all have to be considered and below we have a Case Study.
It appears difficult for investors (and advisers) to truly understand the impact of Brexit on British pensions held by EU residents. Marketing from some EU advisers suggesting that “only MiFID advisers regulated in the EU can now provide advice” is misleading. In reality, this appears entirely at odds with both EU legislation and UK regulations (which continues to remain pre-eminent with regards British pensions irrespective of where an investor lives).
How Pension Advice may be provided is often determined in the country that the client lives in. We have confirmation from various EU regulators that in order to give pensions’ advice that an adviser living in the EU requires an IDD licence in the EU.
However, pension rules are determined according to the National Regulator of the country that the pension is based in. For many British pensions (e.g.safeguarded benefits) an adviser requires a specific UK regulatory licence, which has nothing to do with MiFID.
Put bluntly therefore, Malta rules requiring MiFID have no relevance to an individual living in, say, Portugal who holds a British pension with a UK company.
There are approximately 350,000 Brits resident in Spain alone, many of whom have British pensions- an attractive target for marketeers, so we will focus on Spain.
If the adviser lives in Spain, they must hold an IDD licence for a Spanish based client. However, as the investment advice is provided to the pension trustees, the rules of the country where the pension is based must be followed (not Spain). For more information about this and the requirement for MiFID linked to one jurisdiction click here.
Inappropriate Marketing
A new tactic appears to be the suggestion of new tax laws, post-Brexit, which may affect British pensions. Whilst the marketing suggests that everyone is affected, our case study (below) shows that this simply is not the case.
The generic solution marketed is to transfer British pensions to a QROPS utilising insurance bonds holding funds. However, none of the tax advisers we have spoken to have been able to confirm that Wealth Tax will be applied to British pension funds in Europe.
What are Wealth Tax Rates in Spain?
There is an initial exclusion per person of €700,000 and a €300,000 main residence allowance. For assets accumulating above this, there is a progressive tax starting from 0.2% (national rate) with small incremental increases. This means a couple with mixed assets of 1-2 million EUR may not be liable for Spanish Wealth Tax.
Spanish Wealth Tax Case study example
A Spanish resident owns 50% of their home (Total value €400,000), €200,000 of investments, savings and assets, and a pension of £500,000 (€595,000). Total value of assets would be €995,000 and assume the pension fund is subject to Spanish Wealth Tax.
In this example, the first €900,000 is ‘Wealth Tax Free’. The remaining €95,000 is subject to 0.2%, which equates to €190 Per Annum (pa)
- Typically, QROPS are sold in Spain with an insurance bond, which have a 1% pa charge for up to 10 years and typically approximately €400 annual fee, as well as €900 QROPS fee. Assume funds recommended cost 1.5% pa. **
- The equivalent British pension has approximate costs of 0.2% platform fee, €250 pa fee and fund charges of 0.7% pa (assuming a mix of active and passive clean funds).**
- British pension fees including Wealth Tax (if applied) total 0.98% of the fund value.
- If Spanish Wealth Tax does not apply, then the fees are circa 0.94% pa of the fund value.
When compared; the QROPS fees total around 2.72% of the fund value and the British pension around 1%, That is over €10,000pa difference.
The transfer to a QROPS to avoid a possible Wealth Tax will be far more expensive than the supposed tax avoided!
It is not even certain Spanish Wealth Tax applies to pension funds. We are not tax advisers and would always recommend clients take independent tax advice.
The true impact of Brexit on British pensions advice within the European Union
In real life there is very little impact of Brexit on British pensions’ advice within the EU, and this is because pensions fall largely under national rules and follow double taxation agreements, neither of which were affected by Brexit.
Some European advice firms may promote QROPS because they do not have the licences to advise on UK pension products or are restricted to a few International SIPPs .
In limited cases, for pension funds approaching a million pounds, then clients need to consider the UK Lifetime Allowance Charge and a QROPS may be considered. However, the conclusion is that a vast majority of European residents should retain their British pension and seek independent double taxation advice.
** ongoing advice service fees in this are excluded as they are not product based.
