The Great British Break Off – stepping into the pension income unknown
I am sure I am not alone in having the feeling that Brexit is sucking the life out of me. Without getting into the politics, we appear to be in a position where there is so much conflicting information as to what will or will not happen if there is a “no deal” Brexit, it is of little surprise that people feel they are been sucked into a void not knowing what lies at the other end.
One area which demonstrates this and has received significant press coverage is that European Union (EU) residents who are in receipt of an annuity from a UK based insurance company may no longer be able to access their income from 29 March 2019. The thought that crispy brown expats living in Spain may be left penniless with nothing but their speedos is somewhat alarming.
My original reaction to this news was that if the individual entered into an annuity contract before departure day then there should not be a problem. The European Insurance and Occupational Pensions Authority agree that such contracts would be valid. That said, the problem lies in that the UK insurance company that provided the annuity would not thereafter be authorised to carry out insurance activities in the EU. This leaves a question mark over their ability to be able to ensure the continuity of their services which may prevent them from fulfilling their contracts. What the impact of that will be is unknown. Under some member states’ laws these contracts may be deemed illegal unless the contracts are transferred to legal entities located and authorised in the EU.
For UK insurance companies that were reliant on passporting into other EU countries and who take no further action, means that the recipient of an annuity is, unfortunately, in a vacuum and exposed to significant uncertainty for potentially a considerable period. Cases relating to the continuation of the insurance service may have to be considered by national courts, which is far from satisfactory.
To prevent such insecurity for UK residents who deal with EU life companies, good old Blighty is committing to unilaterally putting in place a temporary permissions regime to enable EU firms to continue to effectively passport into the UK for up to 3 years, whilst such firms go through the process of applying to be directly authorised in the UK. The EU, however, has not yet said it will reciprocate.
So what is the position with SIPPs, should there be a “no deal” Brexit?
The guidance paper provided by the government on ‘Banking, insurance and other financial services if there’s no Brexit deal’ does not cover the issue of payment of taxable income from a UK pension scheme to a tax resident of another EU country. At the moment, such income can be paid under the terms of a double taxation agreement between the UK and the overseas country. The double taxation agreement will normally be that the person is taxed only once, which is normally in the country where they are resident for tax purposes. This is the case whether that country is in or outside the EU. There has not been anything from the government or HMRC to suggest this would change post-Brexit. The cost however, to remit money to an EU country may increase and it may also take longer to process.
Where there may be an impact on SIPPS is in regard to the investments held. The government guidance covers the operation of UK investment firms who currently passport into the EU and so can offer their services in other EU countries. Currently, a UK fund manager can passport into another EU country, therefore a resident of that EU country can invest in that UK domiciled fund. In the event of a “no deal” Brexit, UK fund managers currently operating in the EU under the passporting regime will not be able to do so. This may restrict the investment options available to people living in the EU who may therefore not be able to access UK domiciled funds post-Brexit.
As with life insurance companies the UK government is committing to unilaterally putting in place a temporary permissions regime to enable EU firms to continue to passport into the UK. On the other hand, the EU have not said they will reciprocate this, leaving many fund managers taking precautionary steps to set up a presence in the EU and seeking authorisation.
Hopefully things will be a lot clearer by November at the very latest. Until then, take a deep breath.
This article first appeared on Professional Adviser