Cashing in My Pension By Moving it to Malta
Cashing in my pension. Is it wise? How can I do it? You can cash in your pension in the UK, although you would income tax on your pension and possibly a tax on death. For British expats, there is an option for cashing in your pension by moving your pension to a ROPS in Malta, but in this article, we will explain why it isn’t very wise.
Malta ROPS are now allowing for full pension flexibility, same as the UK. Many pensioners are wandering whether they can simply move their UK pension to a ROPS in Malta and cash it in tax-free. On the face of it, the technical answer is yes, this can be done in certain circumstances. But, there are costs and why would you want to do this in the first place.
A pension is supposed to provide an income for life for when you can’t work. It has worked brilliantly in the UK for many years with both a state pension, a top up to a state pension, an opt out of the state pension, plus company pensions, stakeholder pensions and defined contribution or money purchase pensions. But, all this was turned on its head recently, when the UK decided to do a U-turn on pensions and allow full drawdown. Some of this was to do with bribing baby boomers to win an election by the Conservatives. Partly, it was due to trying to get baby boomers, who are exiting the workforce, to spend to drive the economy. Part of it was due to tax collection, to get money into the coffers quicker to pay for welfare and other social benefits.
The Living Longer But in Ill Health Problem
Most Brits overestimate how long they will be healthy and underestimate how long they can work for. 45% of adults over 65 have a limiting long term illness. What does that mean? It means they can’t work. So, if you think you want to cash in your pension and work til 70, think again. Furthermore, people often think they will die sooner than they think. The average age of death after age 65 is about 87 years old. If you are taking your pension at 55 years old, your pension income needs to last for 30 years. Just let that sink in for a second.
The Inheritance Tax Problem
But, let’s say you have cashed in your pension and you have invested it in a business or a house. You now have the problem of your entire pension pot being exposed to IHT, so 40% of your pension may be taxable on death. You also have to pay UK income tax on that amount. Income tax could be between 20% and 45% on your pension income.
The Income Tax Problem
So, you are one of the 1 in 10 Brits who has moved abroad to sunnier climates such as Spain, Italy or France. You can move your pension to Malta, cash it in and avoid all tax, right?
Wrong! Your pension avoids tax on death as long as you move your UK pot to a Recognised Overseas Pension Scheme (ROPS), but if you cash it in, your pension would be subject to IHT. Furthermore, you may have to pay tax twice if Malta does not have a Double Taxation Agreement with your country of residence. Even, if they do, the tax may be shared or you pay the entire income tax bill in your country of residence.
The Reinvestment Problem
Let’s say that you have reinvested your pension monies by buying property in the UK. Well, there are a number of issues. First, your house becomes part of your estate and is subject to IHT. If you don’t live in it, you also pay both CGT (capital gains tax of up to 28%) and income tax on it. Plus, stamp duty.
In order to make the most of your pension, so that it lasts for the rest of your life, here is what we recommend. Don’t take your pension until you need it. live off your other monies and let compound interest build up your pension scheme. Take it after the age of 65 or older.
Move your pension offshore. if you are in Europe, move it to a ROPS in Malta to protect from any tax on death. It may also be beneficial for income tax. You can also get your currency into EUR to avoid currency fluctuations destroying your monthly pension income.
If you are outside Europe and Malta has no DTA with your country of residence, a ROPS in Gibraltar, New Zealand or Hong Kong may be preferable.
Please contact a QROPS specialist for a pension review with all the updated advice on the latest ROPS fees and structures.