UK to Ireland Pension transfers a case study
Its said that; "cobblers children are the least well shod" so, not wanting to end up with no shoes, and since I'm a Chartered Financial Planner, I decided to give myself an early birthday present - some Financial Planning advice to myself.
I moved to Ireland from the UK at the end of December 2007 and by my calculations over the period 2007 to 2019, Global Equities (Vanguard Global Stock Index Fund which tracks the MSCI World Index) have increased by 139.84% an average annual return of 7.56%pa. My own pension has increased by an internal rate of return of around 7.71%pa so I'm happy enough with that outcome given that my advice to our clients is that your portfolio should really look a lot like the market. The extra return can be explained by an intentional overweight tilt to smaller companies which neutralized my pension and investment costs over the period - one of the benefits of being Dimensional Fund Advisers first client in Ireland.
I will set out below the steps I have taken around some of my own retirement planning provision as a case study of how financial planning can substantially impact on our future financial security - in this case my own.
My Pensions in 2007
Like many people I had a collection of retirement provision in the UK
- 10 years service in a Defined Benefit Pension (DB - risk with employer) guide here
- The balance in Money Purchase defined contribution pensions (DC - risk with me)
- UK State Pension contributions since 1988 guide here
Defined Benefit Pension
I joined a Bank straight out of University and, unfortunately for me, my bonus payments weren't pensionable resulting in a relatively modest pot accumulating off of a relatively low base salary.
That said; I did appreciate the benefits of higher rate tax relief and compound interest over a quarter of a century and made additional voluntary contributions alongside the employer's contributions - the defined contribution schemes.
A quick search of the internet will provide some of the arguments being put forward to Irish Residents with UK Pensions as reasons why it might it be a good idea to transfer a UK Pension to Ireland now?
"Irish Financial Advice - with access to local advice from an Irish adviser"
I find this one tenuous at best. Whilst the majority of UK advisers will not be familiar with the exact details of the Irish Financial system, it really isn't that different. By far the best way to approach cross-border financial matters is for advisers working in each jurisdiction to work together to determine the best solution based on the client's circumstances. Rarely will generic reasons result in the best outcomes for consumers.
"Reputable Providers - your pension fund will be placed with large international reputable pension providers in Ireland"
Because the UK Pension providers don't? Give me strength...
"Tax – A QROPS registered pension fund can accept transfers from the UK to Ireland without any tax liability"
This is most relevant if the UK benefits are hitting up against the UK Lifetime allowance of £1.055M (see below)
"Inheritance – should you pass away your beneficiaries will be claiming from an Irish rather than UK pension"
If you have UK Pension benefits and die before age 75, regardless of whether you are drawing funds from your pension, your entire pension funds can be passed on tax free to your nominated beneficiary. Your named beneficiary does not have to be a dependant and so there is greatly increased flexibility about how to pass your pension on.
"Access - on retirement you will be receiving your money from an Irish Pension Fund rather than a UK Pension fund with all of the associated currency risks"
This is actually a very strong argument but again, poorly constructed reasoning.
Currency risk becomes a potential problem the instant a holder of a UK pension becomes Irish Resident not just at retirement. But, a higher risk equity-based strategy can ignore currency risk whereas a lower risk investment strategy is more impacted by movements in sterling relative to the Euro. So if an Irish Resident has a long time horizon, there is little argument to transfer from the UK before retirement, although the argument is very strong at retirement.
We advised a client who had moved to Ireland some time ago but had left his pension to be managed by a "Private Bank" when confronted about why they had left him in a Sterling account when his liabilities are now in Euro they confessed that they only use model portfolios and they didn't have any flexibility to bespoke the portfolio around individual client circumstances.
"BREXIT – The current crisis in the UK has made many people wary of keeping their money in the UK"
I accept that there is considerable Political uncertainty created by BREXIT, but is it really a credible reason for moving one's pension from the UK? Remember as recently as 2012 the arguments for opening Sterling bank accounts on the foot of concerns about the Euro as a result of concerns around Cypriot banks.
The key to remember is that there will always be a crisis somewhere in the world and this will be used as a narrative to create a sense of urgency to "do something".
In reality most of these blow over soon enough and the world moves onto something else to worry about.
In summary, most of the reasons being put forward for moving pensions from the UK to Ireland are generic "concerns" rather than investor specific circumstance related.
Always remember; "money is like a bar of soap, the more you handle it, the smaller it gets"
I completed a detailed analysis of my deferred benefits in the Defined Benefit Scheme and weighed the pros and cons of taking a transfer vs remaining in the main scheme. I concluded, for the reasons set out in this post, that I would stand to benefit substantially from taking the transfer value and arranged a QROPS transfer of all of my retirement benefits to Ireland.
The UK Lifetime pension allowance at the time was £1.6M so I have used 9% of my UK Lifetime allowance. Notice how, even though the UK allowance has now been restricted to £1.055M, so that today the transfer value would have used 15% of the UK allowance, it is still recognised by HMRC that I have only used 9% of the UK Lifetime allowance.
The decisions around the analysis of a Defined Benefit Scheme are extremely complex and for more details of the issues to consider specifically around UK Defined Benefit Schemes, please see this guide
I then waited 10 years reinvesting retained profits in my business
Over the next 10 years, I didn't pay into my Irish Pension so have claimed no Irish Income Tax relief. We are currently restructuring the share capital in the business so that I can avail of Retirement relief which may be the subject of my next post.
What is Revenue's position now?
Irish Revenue reverted with the following comment:
"I can confirm that in testing the benefits which arise under a relevant pension arrangement any element of these benefits attributable to foreign service can be excluded for the purpose of valuing the amount crystallised at a Benefit Crystalisation Event (BCE). This is on the basis that no tax relief has been claimed in respect of the 4 QROP transfers into Mr. Westlake's scheme and based on each of the individual schemes being approved UK pension funds."
However, Revenue then went on to say
"You should note that only the initial transfer amounts can be excluded for the purpose of valuing the amount crystallised at BCE i.e. no growth relating to the fund is to be included in the exclusion."
Based on Revenue's position, the transfer in value of the 4 QROPs benefits were €152,027.62. The current transfer is now €313,777.67, so based on the above the growth of €161,750.05 would be counted towards the BCE event.
Irish Revenue are therefore indicating that in addition to my using 9% of the UK lifetime allowance, If I crystallize my Irish benefits, I will have also used 8.08% of the Irish Lifetime allowance in respect of the same pension benefits even though I have claimed no Irish Income Tax relief. Arguably, this could result in double taxation in respect of the same pension benefits in two countries which could be in contravention of the double tax treaty.
Irish Revenue seem to be arguing that no income tax relief needs to be claimed or received in order for the benefits to be considered "an Irish pension", something which has profound impact on the use of Pensions as Investment wrappers for Lump Sum investors - again, the subject of another article.
Implications for UK to Ireland pension transfers
If I continue to leave my pensions to grow in Ireland, at the current annual growth rate, I would have used up around €623,000 of my lifetime Irish allowance by normal retirement.
If I now save an additional €2000 pm until I have to retire my pension benefits I’ll accrue a further €1.6M in pension benefits giving a projected combined pension of around €2.2M
That's €200,000 above the current lifetime limit (which was €5.4M when I moved to Ireland) and which could in the future be exposed to an excess pension charge of 70% tax. That’s potentially a €140 grand tax bill, yet the original transfer into Ireland never received any Irish tax relief.
IORPS transfer to Malta
Since 10 years has passed since leaving the UK, all HRMC reporting obligations now fall away.
I therefore applied to Irish Revenue to transfer out to Malta. Irish Revenue confirmed that they had no objection to the transfer.
This has restricted the likely future impact of a BCE of my UK transfer benefits being tested against the Irish Lifetime Allowance and still leaves me with an unused Irish Lifetime allowance of €1.838M.
I'm also able to immediately "retire" my benefits and access a 30% Tax Free Lump sum. This lump sum does not count towards my Irish €200,000 tax free lump sum. The balance can remain invested in perpetuity and I can draw an income but I don't have to since there is no requirement to make "imputed distributions"
For more details see this guide
Remittance basis planning
As a non-domicile, I can take income payments from the pension in Malta and provided these are not remitted to Ireland, the payments will be free of Irish income tax.
For more details see this guide
Top up UK State Pension
A good use of some of this income is to make voluntary State Pension contributions to top up my UK National Insurance record.
I am missing the tax years 2008-2009 to 2018-2019. And can top these up by paying voluntary class 2 National Insurance Contributions.
My current UK State Pension is projected to be £86.75 per week. By paying additional contributions I can top this up to a maximum £168.60 per week.
For more details see this guide
If you would like to discuss any of the issues raised in this article please schedule a time for a call using this link
For information and education purposes only.