Brexit pension and insurance payments
David Anderson at Sykes Anderson Perry solicitors in London
Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Pension law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice. Always consult an Independent Financial Adviser in your jurisdiction.
EU residents will be aware that the current “passporting” arrangements for financial services companies including pension and insurance companies will end on Brexit day. Most people are unaware of these EU rules, developed since the early 1990s, which have enabled companies to sell and service pension and insurance products anywhere in the EU without having to set up a local company. It has been very beneficial to London.
In simple terms a pension company in London can pay annuities to a pensioner in France without a French regulator being involved. Brexit as it currently stands will change all this.
Why the problem?
Insurance and pensions has over the years attracted a fair number of rogues. Collecting in premiums and then later becoming insolvent and unable to pay out on claims and annuities is a classic risk. The EU has put in place numerous rules requiring that finance companies meet solvency tests and are regulated. The insurance industry is keen on this regulation; one reason being that it does not want unregulated companies entering the market and initially undercutting them to gain business only to default later giving the industry a bad name.
Currently - before Brexit
The EU rules say that the EU home country of the pension company regulates it and checks it will remain solvent. Provided the pension company is in good standing in its home country it can do business pretty much as it likes across the EU. This means it can insure any EU resident and pay them a pension annuity. This is liked by insurance companies because it keeps costs down and allows them to sell into a bigger market without getting approval from each countries regulator.
After Brexit as things stand this will be illegal. A UK company selling to an EU resident an insurance product or servicing a policy e.g. by paying an annuity to an EU resident will be breaking the law in the EU country. They will need to be regulated within the EU. This means that they will have to have a company within the EU which is regulated by an EU government and the payment will have to be made from that EU based company. Otherwise the payment of the annuity must stop and no pay-out can be made on any insurance policy.
What is the UK government doing?
The government is aware of the problem and has said it is seeking solutions which may involve a transition period. It has not said it will guarantee annuities will be paid or make payments to ensure EU residents are not out of pocket. This is worrying as pensioners in the EU are in no position to influence the Brexit negotiations and could be pawns in negotiations.
What is unlikely to happen?
The best arrangement for insurance companies is a specific agreement with the EU that the existing passporting arrangements stay in place and there is no change in the way they operate post Brexit. This however is Europe à la carte which the EU has said will not happen. There does not seem to be enough time to get this in place and politically it is very unlikely.
What are the insurance companies doing?
Some are setting up EU companies to transfer their existing contracts to and to sell new business from post Brexit. This is expensive and involves applying to the regulator in the EU country they are setting up in. You may care to check with your insurance company whether they are doing this. Some insurance companies may not do this because they think a solution will be found which means this does not have to be done. This may be risky if you are one of their customers.
They could also sell your contract to a company already in the EU though by doing this they lose out on long term profitable business. This may however be a route if they do not have a lot of EU resident business and think it is easiest just to get out of the EU market altogether. EU residents with such a company will not be reassured.
The insurance industry is making reassuring noises that there will be a “work around” and that a solution will be found. The question is why has this not been dealt with already and pensioners minds put at rest.
What problems could the insurance companies have?
New EU regulators will do their own due diligence on the insurance companies applying to set up in the EU country. This could raise issues which delay or stop their approval being obtained in the EU country. They are likely to need a substantial presence in the EU country and not a “post box” company with no real presence. This will add to the company’s overheads.
The EU regulators are likely to require substantial financial assets to be moved from London and be physically situated within the EU country. The very cynical will say this exposes those capital pension assets to taxation within the insurance company in the EU country as they will be physically there which will in turn reduce the annuities being paid regardless of any contract.
What will the EU country want?
The local EU government will want their pensioners to keep receiving their annuities. Otherwise there will be extreme hardship and they will have to fund them or the pensioners will leave and go back to England which will be bad for the local EU economy. At the same time they will not want this part of the insurance market in their country to start operating unregulated. They will also want their hands on some of the pension money one way or another. It is a classic Brexit problem.
What should pensioners do?
Contact your insurance company and see what they plan to do about annuities and other cover. If they cannot tell you assume the worst. The simple solution is to return to the UK.
A new EU regulator will probably require an audit of people in the EU in receipt of annuity payments. This may require your name and local address being provided to the EU regulator as well as details of the money you receive each month. Some UK pensioners may not be officially tax resident in the EU country but the pension company may have them down as resident there. It may be best to check all your local tax and social contributions are up to date.
If you have more bespoke arrangements, typically for higher income people, it is probably worthwhile reviewing these.
If you have not taken your pension think hard about taking the money out before Brexit. This may be particularly sensible if the value of your fund is relatively low.
The likely outcome is that insurers will have to set up companies in the EU or sell their contracts to EU based pension companies within a short transition period.
The pension money will have to be moved within the EU where it will be taxed one way or another and real annuity payments will be less than would have been the case without Brexit.
Solicitor-Advocate and Chartered Tax Adviser