Retirement
Should expats take their pension pots abroad?
Our guide to the pros and cons of Qualifying Overseas Pension Schemes (QROPS).
High tax, reduced incentives on retirement savings and record low annuity rates are driving a new wave of expats from the UK and leading to a surge in the amount of pension assets that have been shifted into QROPS – Qualifying Overseas Pension Schemes.
These are pensions based outside the UK which are recognised by HM Revenue and Customs (HMRC) as meeting certain conditions and standards equivalent to a UK pension.
Any UK pension can be readily transferred into an overseas scheme, provided that the scheme is registered with the British authorities as a QROPS and an annuity has not been purchased.
These products have become popular among retirees moving abroad who want to avoid UK tax and opt for having a pension in a country with a more favourable tax regime.
UK tax rules will only apply if the retiree has not been resident in the UK for five complete and consecutive fiscal years.
Compared to general UK pension rules, a QROPS could offer advantages including: not having to complete HMRC paperwork to get a pension paid without deduction of UK income tax; a wider choice of investment opportunities; and no restrictions on fund size.
In the UK, the limit is currently £1.5m and expected to drop to £1.25m in 2014/15.
However, QROPS have faced their fair share of scrutiny from the UK tax authorities recently mainly because of the way some were being marketed.
This led HMRC to introduce tighter regulation around the products last year.
John Dunn, technical manager, pensions at James Hay Partnership, says:
“The problem is a number of existing overseas pension schemes have decided to apply for QROPS status and have been marketed as a way of getting money out of the UK to avoid the restricted nature of UK pension legislation.
“The marketing of QROPS from certain sources focused on tax avoidance and not as a means for individuals intent on retiring abroad moving their retirement funds with them. This aggressive marketing was perceived as not being in the spirit of the legislation and provoked HMRC into reviewing the legislation.”
The new rules mean some schemes no longer qualify as QROPS and have been removed from HMRC lists.
So are QROPS still the best option for expat retirees?
Phil Oxenham, head of proposition marketing at Skandia, says: “QROPS offer a wide range of benefits if you’re living or planning to spend your retirement abroad. However, they are not for everyone.”
He suggests people consider the following to see whether they are suitable:
| Consider a QROPS if: | Keep your existing UK pension plan(s) if: | |
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Residency considerations |
• you’re no longer resident in the UK, but have an existing UK pension • AND you are certain that you will continue to live outside the UK for • AND you have no plans to return, except for short visits. A QROPS may also be suitable if you’re still living in the UK, but plan to retire permanently abroad and are sure that you will then be able to retire abroad. |
• you expect to return to the UK for long periods, or permanently, in the future (although, depending on your timings, a QROPS may still be suitable) • OR you plan to stay in the UK.
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| Consider a QROPS if: | It could be better to keep your existing UK pension plan(s) if: | |
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Your existing pension arrangements Before transferring your pension to a QROPS, make sure you’re aware of all the benefits offered by your current arrangements.
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• you have a substantial personal and/or occupational pension plan or you have a smaller amount in your UK pension scheme but you are living and working abroad already and want to continue saving for your retirement • AND you have not yet purchased an annuity • AND your existing pension arrangement is not particularly attractive for one of these reasons: – you’re in a ‘final salary’ scheme, but mergers, acquisitions or poor – you have a ‘defined contribution’ or ‘money purchase’ scheme with no guarantee, or you are concerned about high charges.
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• your only pension is the basic state pension • OR your pension plan is relatively small • OR you have already bought a pension annuity • OR your pension is in a valuable ‘final salary’ or ‘ defined benefit’ scheme, with enough funds to meet all its liabilities • OR it includes benefits such as a • OR your employer bears the costs of the scheme • OR you have a ‘defined contribution’ or ‘money purchase’ scheme with a guarantee, or with very competitive charges. |
QROPS are a complex area and require a detailed understanding of UK pension rules as well as those of the country of the QROPS trustee and the tax rules in the chosen retirement destination.
It is recommended consumers seek advice from a financial adviser who is skilled and experienced in this space.
