Transferring UK pensions to a QROPS can offer expatriates flexibility, tax, estate planning and currency benefits, but is it suitable for everyone?
If you are a US resident then most likely a QROPS is no good for you. It comes with a 25% tax charge as it leaves the UK as there are no "open to public" QROPS policies in the US and to avoid this charge the QROPS must reside in the same jurisdiction as you. However there are certain circumstances where it can still be beneficial especially if you are young and there is a possibility your pension may exceed the Lifetime Allowance Limit.
One of the many pension options available to British expatriates today is transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS).QROPS are foreign pension schemes recognised by HM Revenue & Customs (HMRC) to receive tax-free transfers from UK-registered pension funds. They were introduced in 2006 to help Britons who have permanently moved abroad simplify their affairs by taking their pension savings with them.Despite being widely seen as the answer for expatriate retirees, QROPS are by no means a one-size-fits-all solution. Here we explore some of the advantages and disadvantages of moving UK pensions to a QROPS.
Currently, EU residents can transfer one or more UK pensions into a QROPS without taxation, while transfers outside the bloc attract the UK ‘overseas transfer charge’ of 25%. There are expectations the UK could extend this within the EU/EEA after Brexit, so time may be limited for tax-free transfers.
Once in a QROPS, funds are sheltered from UK taxes on income and gains. They also no longer count towards your lifetime pension allowance (LTA), so can grow unlimited without attracting LTA penalties of 25% or 55% when accessing your money.
While QROPS funds become taxable once you start taking benefits in your country of residence, many expatriates resident in Europe can receive favourable tax treatment. QROPS funds only become taxable once you start taking benefits in your country of residence, but expatriates can usually receive favorable tax treatment.
While UK pensions can be restrictive, many QROPS allow you to take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement when you are most active and reduce it in later years. Or you could take a lump sum and preserve the rest for a rainy day or for future generations.
However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.
QROPS usually offer more options than institutional UK pensions for how your money is invested, and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite.
As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimise risk.
While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still be subject to local succession taxes.
While UK pensions only pay out in sterling, some QROPS allow you to invest your funds and make withdrawals in more than one currency. This is a major advantage for British expatriates living abroad as it reduces dependence on pound/euro exchange rates and removes currency conversion costs.
Funds in a QROPS are no longer governed by UK pension legislation, so are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer funds again to an unapproved scheme within five tax years (for funds transferred after 8th March 2017), or if you permanently return to the UK within ten years.
Note also that the goalposts for QROPS are highly likely to shift in the future, especially after Brexit.
Since their inception in 2006, the UK government has made numerous revisions to pension transfer rules and delisted thousands of QROPS from various jurisdictions. There is now far more complexity in the QROPS market than people realise.
For example, currently there are no Portuguese, French or Cypriot QROPS on the HMRC list of approved QROPS. Expatriates resident in those countries therefore need to take care to choose an eligible scheme in another EU/EEA country, such as Malta, to avoid transfer penalties.
Where HMRC deems that its rules have been broken, it can charge a 55% tax penalty on the transfer amount – potentially even if you had moved funds before the rules changed.
Overseas pension transfers are a complex area – and a key target for pension scams – so regulated advice is essential. Take extreme care to explore your full range of options – before Brexit potentially changes things – to establish the most suitable pension solution for your particular circumstances.If you decide to transfer, make sure you take specialist guidance to find a suitable product, navigate the cross-border tax and jurisdiction issues, and ultimately secure your long-term financial security in your country of choice.
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