Could payments to expat pensions stop after Brexit?
Brexit has thrown up so many concerns for expats already that it's no wonder expats are feeling jittery.
And now it has emerged that private pension providers based in the UK are in danger of not being able to pay pensions to British expats after Britain leaves the EU in 2019.
The risk is so significant that Nicky Morgan, chair of the Treasury select committee, has written a letter raising his concern about the matter to Phillip Hammond, asking the chancellor whether he plans to discuss the problem soon during Britain's exit negotiations.
The news may seem particularly frustrating to some because it comes at a time when British expat pensioners had just started to breathe a sigh of relief over their financial futures.
News broke recently that seemed to allay several areas of concern: expats' pensions will continue to uprate in line with inflation (settling some fears that pensions would become frozen). Plus, Britons abroad will still be entitled to healthcare as the EHIC scheme is reportedly staying put.
These things were encouraging to hear for expats living in the EU, whose pensions have up until now been protected from the damaging effect of inflation by the triple lock mechanism. However, if the current arrangement were to be abolished after Brexit, it could have disastrous repercussions for many expats.
So, what exactly is the latest problem?
Currently, UK insurance companies and pension providers use "passporting rights" to sell pensions, insurance and savings products across borders to customers in the EU. If a deal is not made that allows passporting rights to continue post-Brexit, then the insurers will not be able to continue to pay out to EU customers. If providers were to pay pensions to expat customers without passporting rights, they would be breaking the law.
In the letter, Morgan stated that the issue concerned "hundreds of thousands of insurance contracts sold under passporting arrangements". At the moment, with no preventative measures put in place by the British Government, the insurers who made these contracts will be forced to cut off payments on 29 March 2019 – the day of Brexit.
"The possibility that UK providers may not be legally able to pay out pensions or insurance contracts to citizens in the EU – including UK expats – is a stark example of the consequences of a ‘cliff edge' Brexit," wrote Morgan.
The Association of British Insurers (ABI) has confirmed that insurers and pension providers need to be authorised in an EU country to make payments to customers living in the EU. The ABI is suggesting an arrangement that allows for contracts made before Brexit to follow the same regulations in a post-Brexit world.
There are some other solutions, as reported in the Guardian, such as selling existing pension contracts to EU-based insurers and for insurers to set up offices in the EU so that their business dealings can continue uninterrupted, but these would be lengthy processes, requiring approval from UK courts and national regulators in each EU state respectively.
Whatever resolution is reached, it needs to be decided upon soon, as the ABI has stressed that the problem needs to be addressed as a matter of urgency. Praising Nicky Morgan's efforts to raise awareness about the problem, the ABI warned that there may not be enough time to reach an effective solution if the matter isn't dealt with early on in Brexit talks.
With many British citizens inhabiting EU countries, this has the potential to be a very large-scale problem. Spain, as the most popular EU destination for British retirees (with over 300,000 pensioners living there), is likely to be the country most affected. If the worst were to happen and private pension payments could no longer be made to UK citizens in Spain, their wealth management plans for retirement are likely to be completely ruined, requiring them to make drastically different wealth management plans in Spain or else struggle financially.
But this is the worst-case scenario. Any expats concerned by the prospect of being left with no pension payments should be reassured that it's unlikely the British government will leave their citizens in such a difficult situation. As Morgan mentioned, the UK and the EU both desire a "smooth and orderly Brexit", and it is likely the two sides will easily reach an agreement that will ensure the current system continues. Brexit is a complicated business – that's for certain – but as long as the British government remains vigilant of all possible complications and how they will affect all British citizens (not just the ones still in the UK), no one should be left behind.
However, as Morgan noted, it is somewhat surprising that, given how the government is supposedly prioritising the lives of expats in negotiations, there have so far been no position papers from either side proposing a solution to this pressing problem. Hopefully, this letter to Philip Hammond is the first step to getting the matter sorted.
If you're a British expat living in the EU, you may be worried about the impact Brexit could leave on your life. Blacktower's financial advisers keep abreast of all Brexit updates and will be able to offer you advice based on your individual circumstances. If, for example, you feel you may need to make adjustments to your wealth management in Spain, we can help you make solid plans.
And if you are concerned about a frozen of lost pension, read our blog to find out how a Blacktower adviser could potentially help you.