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Expat financial advice from the experts

Retire in Cyprus – Understanding Pensions

Retiring Abroad

If you have chosen to retire in Cyprus, your pensions can be the key to financial security in retirement. With Brexit looming and more options than ever, pensions can also be a source of concern and confusion. However, expatriates can find rewarding – but limited – opportunities available.

Crunch time for retirement providers

Around 15 million Britons have pensions, where an employer guarantees a fixed, inflation-linked income for the whole of retirement. Widely considered ‘golden’ pensions, income depends on salary and length of service, but is usually quite generous.

With today’s historically low interest rates and increased life expectancy, it’s harder for many providers to afford promised pension payments. The cost of financing these pensions has soared as returns from the assets underpinning them – mostly UK bonds, or ‘gilts’ –have shrunk. Like BHS, with its £571 million pension deficit, companies with significant shortfalls can fail alongside their pension schemes.

Opportunities for a record pay-out

To offload future pension liabilities, many companies are offering members unusually large cash sums (‘transfer values’) to leave. Calculated as a multiple of the annual income due on retirement, it is not unknown for pay-outs to have doubled from 20x two years ago to around 40x since the Brexit vote. In an extreme case, if you had a final salary of £30,000 per year, you may have been offered £600,000 two years ago – but £1.2 million today.

While rare, this example illustrates a tipping point. Properly managed, even more modest sums could provide a retirement income that well exceeds the original annual payment.

Although such high transfer values can outweigh the benefits of drawing a guaranteed pension for life, they may not be available for long.

Opportunities for tax benefits in Cyprus

Many expatriates find it beneficial to transfer their UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) to unlock tax-compliant opportunities when you retire in Cyprus. This can also offer estate planning advantages over UK pensions. While most final salary pensions are payable to your spouse on death, a QROPS offers the flexibility to include other heirs, and even roll your legacy across generations.

However, QROPS tax benefits vary greatly between providers and jurisdictions. It is crucial to take professional, regulated advice to weigh up your options and avoid falling foul of pension scams.

Even without transferring, expatriates resident in Cyprus can enjoy tax benefits on UK pension income. Through the double tax agreement, most UK pensions are taxable solely in Cyprus. As pension lump sums are not liable for Cypriot taxation, this means it is possible to take portions of your UK pension as cash without paying tax on it in either country. However, this does not apply if you take the entire fund as a lump sum – if you do, 75% would be taxable in the UK.

When it comes to UK pension income, you can choose to pay either a 5% flat rate or the Cypriot income tax scale rates. With the tax-free allowance for the flat rate just €3,420 compared to €19,500 for income tax, it may be more beneficial to opt for income tax.

However, bear in mind that anything over the allowance would become liable for income tax rates ranging from 20% to 35%, so for larger pensions, the 5% tax rate may be more advantageous.

Potential limited window of opportunity

There is speculation that the UK government may stem the flow of pension transfers with law changes to make withdrawals more difficult. Some predict they may also start taxing pension transfers for non-residents to recover revenue from overseas nationals. Currently, you can enjoy UK tax relief on pension contributions, receive tax-free growth and potentially pay no UK tax to access your funds as a Cypriot resident. An ‘exit tax’ would put an end to this.

If you decide transferring is right for you, now may be the time to act, as there may be a limited time to transfer without penalties. Consider what could work for you now, under current rules, before the window closes and you retire in Cyprus. 

Beware the lifetime allowance

Note that if your UK pension savings (excluding the State Pension) exceed £1 million, you will breach the UK lifetime pension allowance. Even if you have less than this or you have already started drawing your pension, investment growth over the years may tip you over the limit.

Funds over the lifetime allowance are liable to 55% UK taxation when you take it out or pass it on death as a lump sum, or 25% when taken as income or transferred to a QROPS, wherever you are resident. If you are close to this limit, you should consider HMRC ‘protection’ options or transferring to a QROPS to reduce exposure to tax penalties. Once in a QROPS, your funds are out of reach of lifetime allowance charges, no matter how much you have in total or how you access them.

Establishing your best approach

Transferring UK pensions comes with risks and many people are better off staying where they are. Make sure you take time to fully understand the long-term implications. If you have benefits worth over £30,000, the Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring.

You should at least confirm your current transfer value and check if your scheme is at risk.

The government’s Pension Protection Fund only compensates up to £33,678 a year at age 65. If your pension offers more and your scheme is vulnerable, consider transferring.

With so much uncertainty ahead, there has never been a better time to review your pension arrangements. An adviser can help you with personalised pension planning that keeps up with any post-Brexit developments and opportunities.

As with all financial advice, it is important to remember that there is not a ‘one size fits all’ solution. Retirement Planning can be a very complex area. Special care needs to be taken when looking at recommendations that involve Defined Benefit / Safeguarded Schemes.

However, you have a massive opportunity to benefit from these unique times. Why not find out, we are here to help.

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