The idea of a pension is relatively straightforward. It is the trading of a lifetime of hard work in return for some degree of security in retirement.
At the end of the day, whether in Poland or the UK, what most of us want is to enjoy our retirement years without counting the pennies or groszy.
Unfortunately, the reality is that, thanks largely to decades of government meddling, pensions can be incredibly complicated.
In this article, I will cover five key things you need to be aware of before deciding what to do with your UK pensions.
1️⃣ UK State Pension in Poland – what you need to know
To qualify for the full UK state pension, you must have paid UK National Insurance contributions for 35 years.
Otherwise, provided you contributed for at least 10 years, the amount you receive is based pro-rata on how many years you secured.
You can make voluntary contributions to increase your entitlement while you are living in Poland, this can be done for as little as £3.15 per month (tax year 2022/2023) and is usually worth doing.
UK nationals who are at State Pension age, currently 66, and resident in Poland (and other EU countries) can receive the UK State Pension and have it increased in line with inflation.
When living in Poland, it is paid gross and taxable here. This means that you will not be able to use your UK annual allowance to offset it.
You can find out more about the UK State Pension and it’s benefits for expats in this guide.
2️⃣ ‘Defined Benefit’ pensions and ‘Defined Contribution’ pensions – what’s the difference?
People who worked for UK companies for a long time often have traditional company pensions known as ‘defined benefit’ or ‘final salary’ (they’re the same thing) schemes.
With these, the amount of pension that you receive is based on a) the number of years you worked for the company and b) your final salary.
These schemes are becoming more of a rarity because they are incredibly expensive for the company to maintain, particularly with people living longer than originally forecast.
These schemes provide a guaranteed income for life. It may be possible to exchange this guaranteed income for a capital sum but it is usually best not to do so.
These days employers more often favour ‘defined contribution’ or ‘money purchase’ pensions.
The benefit for employers with such schemes is that their financial commitment is quantifiable.
Effectively they are passing the risk of their being insufficient funds in retirement on to you.
Generally, if you are resident abroad, income from both of these types of pension are liable to local income tax in your country of residence, instead of UK tax (only government service pensions are taxed in the UK). This is the case with Poland.
However, any Pension Commencement Lump Sum (also known as Tax Free Lump Sum) from a UK pension will not be taxable in Poland.
3️⃣ What is the ‘lifetime allowance’?
In simple terms, the lifetime allowance is the maximum combined amount you can accumulate in UK pensions (excluding state pensions).
It is currently frozen at £1,073,100.
Any amount above the lifetime allowance is subject to a one-off tax charge of 25% if the excess is paid as a pension, or 55% for lump sums.
It is not limited to UK residents, so also affects expats in Poland.
Fortunately, there are some ways to increase the lifetime allowance, such as the Non-Residence Enhancement Factor.
4️⃣ What benefits do QROPS bring to expats in Poland?
A Qualifying Recognised Overseas Pension Scheme is an overseas pension created to receive monies from UK pensions when the owner has moved abroad.
Any QROPS must be recognised by HM Revenue & Customs.
One reason many expatriates transfer UK pensions to QROPS is to avoid further lifetime allowance charges (see above).
Another reason is currency. UK pensions are paid in Sterling, which is not helpful if most of your expenses are in Zloty or Euros.
Others decide that since they have left the UK, why leave a major asset behind, completely at the mercy of the UK taxman?
A downside of QROPS is that, depending on the jurisdiction that it is based in, any Pension Commencement lump Sum may become taxable in Poland.
Another is the risk of being stung by the Overseas Transfer Charge which was introduced in 2017 to deter people from transferring their pensions out of the UK.
You can read more about QROPS in this guide.
5️⃣ What does the post-Brexit future hold for pensions?
The best news must be that the UK will continue to uplift UK state pensions, and continue to honour the S1 system for those receiving UK state pensions.
Rules can change though, and now the UK is outside the EU/EEA it could very easily extend the ‘overseas transfer charge’ to EU cover residents too.
Any renegotiation of the UK-Poland double tax treaty is unlikely as this was written independently of the EU.
However, from the Treasury’s perspective, one attractive option would be to remove personal allowances for non-UK residents.
The bottom line is that pensions can be complex with pitfalls not immediately visible and an area to seek expert advice on.
We all like doing a little bit of DIY from time to time, but not if it could adversely affect our hard-earned wealth.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon my understanding of current taxation laws and practices which are subject to change at any time. As always with tax information, should seek personalised advice.
Get in touch
If you would like to understand more about your UK pension options, drop me a line.
▪️Ross has been a financial adviser in Poland for the past 22 years.
▪️He specialises in working with British expats who are looking to optimise their finances for retirement.
▪️He is qualified as a financial adviser both in the UK, as a Chartered Financial Planner®, and in the EU, as a European Financial Planner®.
▪️Ross lives in Warsaw, Poland with his wife and 2 children.
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