The options for expats in Spain, in terms of pensions, tend to fall into 3 categories. These are to maintain a pension and continue to contribute to a retirement plan once you have moved abroad with a number of tax efficient retirement plans available for expats. Secondly, it is possible for expats to transfer their UK pension overseas, and potentialy benefit from increased flexibility, and reduced tax liability, usually via a QROPS and finally, it is also possible to have your UK state pension paid to you directly overseas and straight into your Spanish bank account, however with this option there are of course currency risks.
Maintaining a Pension
If you are planning to work and live overseas, either permanently or on a temporary basis, an international retirment plan could help you save in a tax efficient way, and allow you to enjoy the benefits at a later date, wherever you may be based in the world.
Offshore financial centres and jurisdictions can provide clients with a viable home for long term investment retirement plans, especially if you are undecided as to your eventual retirement destination, as locating your pension investment offshore should mean that any future movement of capital or income is not impeded. Although pension funds in ‘offshore’ or ‘low-tax’ jurisdictions will grow partially or entirely without taxation, and may have been established out of tax-free income in the first place, any retirement income eventually received in a high tax country will obviously be liable for taxation.
Offshore pensions providers, have tended to stick together in well-regulated jurisdictions which have stringent investor protection legislations, such as Jersey, Guernsey, and the Isle of Man. As a result, these jurisdictions have developed responsive regulatory regimes and highly efficient business infrastructures. Dublin and Luxembourg have also come into favour as offshore locations from which to offer pensions although these products are usually more specific to a European audience.
Clients can decide whether to go for a pre-wrapped pension plan, or create a portfolio of suitable investments with the help of a qualified advisor with a view to providing retirement income in that way. Both forms of pension investment have their advantages and their disadvantages, the path you choose will inevitably come down to your personal preferences and circumstances.
Putting together a managed portfolio with the help of an IFA has both advantages and disadvantages. This type of retirement planning could be seen as more flexible, as the investment choices to a certain extent are in the clients hands. You can choose how varied you would like your investment vehicles to be, and whether to include shorter-term investments, or savings schemes with no strings attached.
There is also the advantage that there are no penalties for reduction or discontinuance of investment if your particular circumstances were to change unexpectedly, and there are usually no limits as to the maximum or minimum investment, or the frequency of contribution. However, this flexibility can sometimes come with added risk which is not really ideal when investing for your retirement, which will require more frequent checks and reviews. Therefore, you need to decide, with the help of your financial advisor or broker, whether the added flexibility is worth the potential risk and added responsibility.
Alternatively, you could opt for a ready packaged pension or retirement income plan. Many domestic insurers also offer international alternatives to domestic pension plans tailor made for expatriates, usually situated in one of the offshore locations and jurisdictions previously mentioned.
Transfering a Pension
It is now possible, to transfer your UK pension fund to an offshore jurisdiction, via a scheme called a Qualifying Recognised Overseas Pension Scheme or (QROPS). This is due to the advent of the European Union’s freedom of transfer of monies directive, which provided private investors with the opportunity and flexibility to invest across the EU and select those jurisdictions that appeared more attractive by virtue of lucrative tax benefits and incentives.
This EU directive represented the first step on the way to an internal market for occupational retirement provision organised on a European scale. Indeed with the UK pension regime overhaul in 2006, great industry attention has been given to those investors who hold dormant UK private and company pension schemes and the opportunity to transfer the value overseas through the HMRC authorised QROPS system. With now over 170 authorised schemes investors are offered a multitude of options if they wish to transfer their pensions to an authorised jurisdiction. Traditionally, the most popular options for clients advised by their financial advisers have been the crown dependent channel-islands: Guernsey and the Isle of Man. Schemes are also now available in mainland Europe through Gibraltar, Malta, Latvia and Lichtenstein, and further afield in Australasia, namely Hong Kong and New Zealand
Spain Pension Scheme
The Spanish government has approved a reform aimed at reducing pension spending by about 3.5% of GDP by 2050. The key features of the reform are as follows. The legal retirement age will see a gradual increase from 65 to 67 over the period between 2013-2027. The earnings record will see a gradual lengthening of the period used to calculate full pension benefits from 15 to 25 years. Contribution years increases from 35 to 37 with the calculation on the basis of monthly payments rather than rounding to the next full year as prior to the reform. The percentage of the full pension received is now proportional to the number of contribution years starting from 50% for careers of 15 years to 100% for careers of 37 years. The early retirement option will see a postponement from 61 to 63, with limited eligibility and it will only be possible after 33 contribution years rather than 30. The reform has also seen a voluntary work extension with bonuses of 2%, 2.75% and 4% for each additional year worked for careers below 25 years, 25 to 37 and over 37 respectively. Lastly the reform includes a sustainability assessment with a revision of the system every 5 years from 2027, taking into account changes in life expectancy.
The Spanish pension reform still requires parliamentary approval. Without this the chances are that Spain will face strong spending pressures due to ageing and slowing population growth. Indeed, ageing-related spending might well contribute to an increase in the debt/GDP ratio in the long term. According to the European Commission’s simulations in the Sustainability Report, published before the proposal of changes to the pension system, the long-term sustainability risk to Spain’s public finances is high, together with Ireland, Greece and the Netherlands. Naturally, these simulations, while still useful, are highly uncertain. It is unlikely that bond markets will keep financing government debts amounting to a multiple of the GDP of the respective countries or that governments will maintain their policies unchanged in the presence of ever-increasing debts.