Brexit – The QROPS Bureau’s views on the potential impact on pensions
It'll never happen!
When I was first asked to comment on Brexit implications at this start of this year I didn't think it would happen! At that point the date for the referendum had not yet been set and the term Brexit had only just started to be coined, to describe something which seemed idealistic and extremely unlikely to become a reality.
As the campaigning machines swung into action, there were shifts in public sentiment from one direction to another as the various camps put forward their views. Only in recent weeks had a Brexit seemed to me to be a real possibility and even then both the bookmakers and the City were betting against an exit right up to the wire – on the evening of the referendum results being announced.
But now it has happened, the public has voted and the government are faced with the task of managing the huge uncertainly that this result has created and in negotiating the UK's exit from the EU in the most positive way possible.So what might be the implications for pensions and in particular international pensions going forwards?
We have already seen a significant fall in UK share prices and in the value of Sterling, although hopefully these will continue to recover as the markets stabilise. Ros Altmann, the UK Minister of State for Pensions said on the eve of the referendum that leaving the EU would "damage UK growth and undermines confidence in the future". "If growth, jobs, company profits and investment all fall – as predicted by the overwhelming majority of leading researchers, then UK pensions and pensioners will suffer."
Ms Altmann also said "the catastrophe for UK pensions would be to risk undermining our economy by taking a giant gamble that assumes we can somehow find good trade deals in the global marketplace without any plan or strategy in place for actually doing that".
Ms Altmann added: "To suggest that we are in real danger of ending up with no secure pensions if stay in the EU is the wrong way round. The biggest danger is if we leave and end up as an isolated outpost with little power or influence in the world, trying to trade with others who need us far less than we need them. If that happens, our economy will be much weaker and support for pensions far lower. Employers will not be able to afford contributions, tax revenues will mean more difficulty in increasing state pensions each year and individuals who lose their jobs will not be able to save for their future. That is where the biggest danger lies."
Moody's, Standard and Poor's and Fitch have all reviewed the UK's credit rating downwards in the last few days.The Bank of England have said that they are prepare to alter interest rates , either upwards or downwards, to help offset any economic impact of Brexit, with it currently looking like they will reduce interest rates to stimulate the economy. This and other factors will have a knock on effect on the cash equivalent transfer values available from defined benefit pension schemes.
At the time of writing this article, we are still seeing the fallout from the referendum result, with the majority of Labour ministers resigning or being sacked due to a lack of confidence in their leadership. The Scottish First Minister has called for a 2nd referendum over Scottish independence due to the strong feeling that the Scottish public have been forced out of the EU despite an overwhelming majority within Scotland to stay in.
Whilst most of these issues are negative, the impact on UK pensions is likely to be linked to the wider economic environment as has always been the case. There are unlikely to be any major changes to the UK's pensions rules and regulations as a direct result of Brexit.
International pensions such as QROPS will feel the affect of these economic changes and may also be affected in other ways in the longer term, as once the UK is no longer part of the EU it will be able to make its own regulations without having to take into account the wider EU rules.
David Cameron had originally said that Article 50 of the Lisbon Treaty is unlikely to be invoked until a new Prime Minister is in place post October, although the EU have said they wish negotiations to commence immediately. Whenever the process starts, it is widely expected that there will be at least 2 years of negotiations over the terms of the UK's exit from the EU, possibly up to 5 years. Even after this 2-5 year period, it is likely that QROPS will be a fairly low priority on the UK government's agenda but in the longer term there are a number of potential implications for international pensions in addition to the general economic impacts:
Increasing number of Expatriates?
Those who voted Remain and who do not relish a future within a UK who are not part of the EU may consider leaving the UK and will wish to ensure their pensions are best suited to their changed circumstances. Whilst some of these people will move to EU countries, many others will migrate to countries outside the EU. Wherever these people move to, this trend, if it occurs, may lead to an increase in demand for international pension solutions such as QROPS.
Freedom of Movement of Capital
Much has previously been made out of the fact that QROPS has a long term future due to the EU freedom of movement of capital rules – the UK government has not been able to restrict the movement of capital within the EU by making QROPS overly restrictive, even if it wanted to. Once the UK is out of the EU this could change and the UK HMRC may be able to introduce further restrictions.
Lifetime Allowance Planning for UK residents
One area which this may impact upon is the use of QROPS by UK residents for lifetime allowance planning. Once the UK leave the EU, HMRC may be able to restrict the use of QROPS by UK residents, which they have not previously been able to do.
Flexible Drawdown in Malta
Following the introduction of flexible drawdown into the UK pensions regime in 2015, Malta was able to avoid the "temporary "retention of the "70/30" rule (70% of the pension scheme to be used to provide an income for life), because it was part of the EU. Once the link has been severed between the UK and the EU, Malta may have to revert to more closely following UK HMRC rules and introducing the "70/30" rule.
Non EU QROPS
As stated above many UK residents have moved and will continue to move to countries outside of the EU. Many QROPS are not domiciled within the EU and so are unlikely to be effected by Brexit.
Taxation of transfers
Following an exit from the EU it is possible that the UK will continue to allow portability of pensions but introduce a tax on transfers, similar to the US system.
Restrictions on advice?
The UK being a member of the EU has made it fairly straightforward for UK FCA regulated advisers to advise clients within Europe under passporting arrangements. The UK's exit from the EU could potentially make this process more difficult.
One of the major QROPS jurisdictions is Gibraltar. Following the outcome of the EU referendum, Spain has called for the UK to enter negotiations over co-sovereignty. This would be a further chapter in the long running historic dispute between Britain and Spain over the sovereignty of Gibraltar.
The majority of the above potential impacts are unlikely to occur until after Brexit has taken place. During the interim period of at least 2 years, whilst the exit is negotiated, there is likely to be an increase in demand for international pensions solutions such as QROPS, whilst people have some certainty over the rules and the treatment of their pensions.
No one size fits all
As has always been the case the most suitable solution depends upon client circumstances and the regulatory climate at the time. The world changes, the country changes and the regulations change, and so the most suitable solution will change. The QROPS Bureau will assist professional advisers in implementing the appropriate planning for their clients, whatever the political environment and regulatory conditions prevailing at the time.