Getting the most out of your pension in Spain

Many Britons wait until they retire before moving to Spain so that they do not have to worry about earning a living, relying instead on their pension to provide a regular income. If you have contributed to a pension scheme during your working life you will want to get the most from it that can be taken.

By Jane Goodall, Director – International Pensions – Blevins Franks

Many Britons wait until they retire before moving to Spain so that they do not have to worry about earning a living, relying instead on their pension to provide a regular income. If you have contributed to a pension scheme during your working life you will want to get the most from it that can be taken.

Until recently, UK pensions have had to remain under UK rules, even if you retired to Spain. However, thanks to new legislation in the UK, it is now possible for British expatriates to export their pension fund out of the UK, thereby avoiding the various restrictions that the UK imposes on how you take your pension benefits. There is also the possibility that you will pay less tax in Spain.

UK pension schemes can be very inflexible. There are restrictions on how and when you draw down your benefits and in most cases you are forced to buy an annuity at age 75. At that point you then cannot leave any balance of your pension fund to your heirs on death.

Overall, therefore, transferring your pension out of the UK and avoiding such restrictions could help you improve your retirement years in Spain. It could also mean that you leave your heirs a larger inheritance.

The new legislation has created international pension products called QROPS – Qualifying Recognised Overseas Pensions Schemes. They are non-UK pensions which meet the rules of, and are authorised as pensions in, the jurisdiction where they are located.

HM Revenue & Customs (HMRC) now allows UK pension rights to be transferred out of the UK into a QROPS. In order to obtain QROPS status, the provider must meet a number of HMRC rules relating to how and when benefits can be taken. It must also comply with reporting requirements for five complete tax years after the fund holder has left the UK.

While some QROPS have rules whereby you must be resident in the country where the scheme is located, others do not. In this case you can choose a tax friendly jurisdiction which has more flexible rules on how the benefits can be taken. Not all overseas pension schemes qualify as QROPS so you need to ensure that you only transfer into an authorised scheme.

In order to transfer your pension out of the UK you must have already left the UK for tax purposes or be intending to move out of the UK shortly. Once you are tax resident in Spain, you can transfer your pension fund out of the UK into a QROPS.

Which UK pensions can be transferred to Spain?

Many types of pension can be transferred, including personal and occupational pension schemes. Pensions that are in drawdown (even if currently in payment) and protected pension rights can also be transferred.

Unfortunately, it is not possible to transfer a basic state pension, or if you have already purchased an annuity. This also applies to most Final Salary Schemes if you have already begun taking benefits.

What are the benefits?

After you have been non-UK tax resident for five or more complete tax years, having transferred your pension into a QROPS, HMRC can no longer impose any requirements or restrictions on your pension fund. This is when the key benefits start:

– You will not have to purchase an annuity unless you want to.
– Your heirs will be able to inherit the balance of your pension fund when you pass away, something which is not possible under UK rules.
– Pension rights transferred into a QROPS are protected from UK inheritance tax.
– Pensions in a QROPS offer more flexibility on how and when you take your benefits than those controlled by HMRC.
– You can choose to receive your income in Euros (or any other currency), and therefore will not be subject to the exchange rate risk when you receive your pension in Spain.
– Your fund will no longer fall under the UK tax net. The Spanish tax on a properly constituted pension plan is highly beneficial. There is no tax to pay unless withdrawals are taken, and they can be structured so that minimal taxes are payable in Spain.
– Regulation and advice for pensions in Spain

Pension transfers are heavily regulated by the Financial Services Authority in the UK. If you are a Spanish resident careful consideration should be given to only taking pension transfer advice from advisers who are both regulated in the UK and in Spain and are specifically authorised to give advice on transferring UK pensions.

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