UK Pensions Reform Overview
By David Odonoghue
This article is published on: 31st December 2014
This year brings about major changes in UK pension rules. Under the reform of ‘Freedom and Choice in Pensions’, people will be provided with more choice about how and when they can take their benefits from certain types of pension arrangements.
Following proposals first made in March last year, subsequent consultation resulted in the Pensions Taxation Bill being published in August, with further amendments being made in October. Additionally, some provisions were clarified in last month’s UK Autumn Budget Statement. Therefore, subject to there not being any further changes before the eventual enactment of the legislation, we can be reasonably certain of the new rules.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs are a rare breed now, as employers have found this type of arrangement too costly to maintain. This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.
The second type of pension is what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get depends on the value of your ‘pension pot’ at retirement and so the investment risk rests with you. There is no promise from anyone and therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP, if they have left the service of the former employer.
The majority of the changes will be effective from 6th April 2015 and these will apply to ‘money purchase’ pension arrangements only. Therefore, people with deferred pension benefits in funded defined benefit plans, who wish to avail themselves of the changes, must first of all transfer their benefits to a money purchase scheme. Members of unfunded public sector pension schemes will not be allowed to have such a transfer.
Under the new rules, people will be able to take all of their ‘pension pot’ as a one-off lump sum or as several separate lump sum payments. For UK resident taxpayers, 25% of each amount will be paid tax-free and the balance will be subject to income tax at the marginal rate (the highest tax rate being 45%).
Alternatively, it will be possible to take 25% of the total fund as a cash payment (again, tax-free for UK residents) and then draw an income from the remaining fund (taxed at marginal rate). The commencement of income withdrawal can be deferred for as long as the person wishes. Furthermore, there will be no minimum or maximum amount imposed on the amount that can be withdrawn in any year.
The Annual Allowance, which is the amount of tax-relieved pension contributions that can be paid into a pension fund, is currently £40,000 per annum. For anyone who flexibly accesses their pension funds in one of the above ways, the Annual Allowance will be reduced to £10,000 for further amounts contributed to a money purchase arrangement.
However, the full Annual Allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further defined benefit pension savings.
The ‘small pots’ rules will still apply for pension pots valued at less than £10,000. People will be allowed to take up to three small pots from non-occupational schemes and there is no limit of the number of small pot lump sums that may be paid from occupational schemes. 25% of the pot will be tax-free for a UK resident. Accessing small pension pots will not affect the Annual Allowance applicable to other pension savings.
The required minimum pension age from which people can start to draw upon their pension funds will be set as age 55, in all circumstances (except in cases of ill-health, when it may be possible to access the funds earlier). However, this will progressively change to age 57 from 2028; subsequently, it will be set as 10 years below the State Pension Age.
The widely reported removal of the 55% ‘Death Tax’ on UK pension funds has been clarified. Thus, whether or not any retirement benefits have already been paid from the money purchase fund (including any tax-free lump sum), the following will apply from 6th April 2015:
- In the event of the pension member’s death before age 75, the remaining pension fund will pass to any nominated beneficiary and the beneficiary will not have any UK tax liability; this is whether the fund is taken as a single lump sum or accessed as income drawdown; or
- If the pension member is over age 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income drawn from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
There will be more flexibility for annuities purchased after 6th April 2015. For example it will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before State pension benefits begin. In addition, there will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and providing that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the Double Taxation Treaty between the UK and France. However, there are French tax implications to be considered, as follows:
- you will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate;
- if France is responsible for the cost of your French health cover, you will also be liable for social charges (CSG & CDRS) of 7.1% on the amounts received;
- the former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax (i.e. if your net taxable assets exceed the wealth tax entry level).
Therefore, as a French resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action. Such advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) could be in your best interest.
Note, that for those expats who already have transferred pensions to a QROPS or are thinking of doing so? the Pension Taxation Bill makes provision for the proposed UK pension reform to follow through to such schemes.
However, a complication exisits, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pesion funds in all circumstances.
The Pensions Taxation Bill does already make some provision for the proposed UK pension reform to follow through to Qualifying Recognised Overseas Pension Schemes (QROPS). However, a complication exists, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pension funds, in all circumstances.
Therefore, before the new flexible rules could apply to QROPS, the UK Regulations must be amended and it is understood that there is on-going work in this regard. Whether this work will be completed before 5th April 2015 is not known.
However, even if the UK does amend the QROPS Regulations, it will then fall to individual QROPS jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own Regulators may not agree entirely with the UK’s ideas of flexibility! In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation outcome of someone fully cashing-in their pension fund (whether whilst still in a UK pension arrangement or if later allowed, from a QROPS) is likely to be a sufficient practical deterrent for anyone actually wanting to do this. Therefore, for someone who has left the UK, a QROPS should continue to be a viable alternative to retaining UK pension benefits, particularly since the advantages of a QROPS have not changed. However, everyone’s situation is unique and this is why seeking advice from a competent professional is essential.
Should I stay or should I go?
By Spectrum IFA
This article is published on: 25th November 2014
Quite frankly I’ve been struggling to think of what to write about this week, but then it suddenly struck me that there has been a recurring theme in a number of my client meetings recently. That theme put simply is, ‘Where will I end my days; in France, or in England?’ This isn’t a popular topic of conversation amongst vibrant, exuberant, middle aged expatriates, but we’re not the only people here. We are in the company of many seasoned expats who’ve been here longer than we have; seen it all; done it before we did, and are feeling a bit tired. Many of them are ‘going home’.
We should pay a lot of attention to this group, because we are going to inherit their shoes. We need to learn from their experiences, and take the opportunity to plan for the time when we will experience what they are going through.
Five years ago, when writing on a similar theme, I think I proffered the theory of the three ‘D’s as the principal reason to return to the UK: death, divorce and debt. I still think that they are valid causes, but I now think that there are many subtle variations to be taken into account, and the biggest addition to the equation is age. Age changes your perceptions; often for the better, but age often also brings insecurity and loneliness. Add to that illness, and maybe bereavement, and you have a powerful reason to examine your reasons to continue to live hundreds of miles away from a family that (hopefully) continually worries about you. In short, no matter how much we pooh-pooh the idea now, the chances are that we may eventually end up being cared for in our final years in the UK rather than in France.
OK, that’s enough tugging at the heartstrings. Why is a financial adviser (yours truly) concerned about where you live, and where you may live in future? The answer is currency, specifically Sterling and Euro. In a previous existence, I was responsible for giving advice to corporate and personal clients of a major High St bank regarding exposure to foreign exchange risk. The basic advice was simple – identify and eliminate F/X risk wherever you can. F/X risk is for foreign exchange dealers; it is gambling. Don’t do it unless you know what you’re doing, and even if you do, prepare to lose money.
On a basic level, eliminating exchange rate risk is easy. Faced with a couple in their 50’s relocating to France with a healthy investment pot behind them and good pensions to support them in the future, I will always ask ‘Where do you intend to spend the rest of your days?’ The answer is usually an enthusiastic ‘France, of course. We have no intention of going back to the UK. In fact wild horses wouldn’t drag us back.’ I know this for a fact – I’ve said it myself.
The foreign exchange solution is simple. Eliminate your risk. Convert your investment funds to Euro (invest in a Euro assurance vie). Convert your pension funds to Euro (QROPS your pension and invest in Euro). Job done! Client happy, for now! But what happens 25 years later, when god knows what economic and political shenanigans have transpired, and the exchange rate is now three Euro to the pound and the surviving spouse wants to ‘go home’?
As it happens, I will no longer be his or her financial adviser. The chances are that I will have popped my clogs years ago, but If not, I will most likely be supping half a pint of mild in a warm corner of a pub somewhere in the cheapest part of the UK to live in. (In fact that is poetic licence, as I know full well that I’d probably be being spoiled rotten in my granddad flat in one of my sons’ houses). To draw this melancholy tale to a close, I’d just like to round up by saying that things are rarely as simple and straightforward as they seem. My job is not always to take what you tell me at face value. I know people who’ve been here longer than you. My advice may well be ‘hedge your bets, spread your risk’. I will give you the best possible investment tools for your money and pensions, but I might just surprise you with my recommendation as to what currency those funds should be invested in.
What New Year’s Resolution can I make for 2015?
By Amanda Johnson
This article is published on: 18th November 2014
As 2014 draws to an end and we look forward to spending the festive period with family and friends, there is one New Year’s resolution that you can make which will benefit both you and your family and that is to make sure that you review your finances in 2015.
2014 has seen the UK Government make changes to pensions, the French Government levy Social Charges on areas not previously charged and a joint agreement on Wills which is due to come into effect during 2015. On top of this, there is constant media concentration on whether the UK is better off in or out of the EU. Bearing all of this in mind, it is worth taking advantage of a free financial review to ensure your savings, investments & pensions are working for you in the most tax-efficient manner and that they match your goals and aspirations for the future.
A free financial review will include the following areas:
- Investments – to ensure they are as tax efficient as possible
- Inheritance tax – to minimise the amount of inheritance tax imposed and increase your say in where you money goes after you die.
- Pension planning – putting you in better control of planning for your future
Whether it has been a while since you last looked at your finances or you are unaware of how changes both in the UK & France could affect you, a decision to take a free financial review could be one of the best New Year’s resolutions you can make.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for reviews, reports or any recommendations we provide.
Have a Merry Christmas and a very Happy New Year.
Planning to retire to France?
By Spectrum IFA
This article is published on: 13th October 2014
Retiring to France can be dream come true for many people. The thought of that ‘place in the sun’ motivates us to save as much as we can whilst we are working. If we can retire early – so much the better!
In the excitement of finding ‘la belle maison’ in ‘le beau village’, we really don’t want to think about some of the nasty things in life. I am referring to death and taxes. We can’t avoid these and so better to plan for the inevitable. Sadly, some people do not plan in advance and only realise this mistake when it is too late to turn the clock back. For example:
- Investments that are tax-free in your home country will not usually be tax-free in France. For example, UK cash ISAs and National Savings Investments, including premium bond winnings would be taxable in France. So too would dividends, even if held within a structure that is tax-efficient elsewhere. All of these will be subject to French income tax at your marginal rate (ranging from 0% to 45%) plus social contributions of 15.5%.
- Gains arising from the sale of shares and investment funds will be liable to capital gains tax. The taxable gain, after any applicable taper relief, will be added to other taxable income and taxed at your marginal rate plus social contributions.
- If you receive any cash sum from your retirement funds, for example, the Pension Commencement Lump Sum from UK pension funds, this would be taxed in France. The amount will be added to your other taxable income or under certain conditions, it can be taxed at a fixed rate of 7.5%. Furthermore, if France is responsible for the cost of your healthcare, you will also pay social contributions of 7.1%.
- Distributions that you receive from a trust would also be taxed in France and there is no distinction made between capital and income – even if you are the settlor of the trust.
As a resident in another country, it would be natural for you to take advantage of any tax-efficiency being offered in that jurisdiction, as far as you can reasonably afford. So it is logical that you would do the same in France.
Happily, France has its own range of tax-efficient savings and investments. However, some planning and realisation of existing investments is likely to be needed before you become French resident, if you wish to avoid paying unnecessary taxes after becoming French resident.
I mentioned death above and as part of tax-efficient planning for retirement, inheritance planning should not be overlooked. France believes that assets should pass down the bloodline and children are ‘protected heirs’ and so are treated more favourably than surviving spouses. Therefore, action is needed to protect the survivor, but this could come at a cost to the children – particularly step-children – in terms of the potential inheritance tax bill for them.
Whilst there might be a certain amount of ‘freedom of choice’ for some expatriate French residents from August 2015, as a result of the introduction of the EU Succession Rules, this only concerns the possibility of being able to decide who you wish to leave your estate to and so will not get around the potential French inheritance tax bill, which for step-children would still be 60%. Therefore, inheritance planning is still needed and a good notaire can advise you on the options open to you relating to property.
For financial assets, fortunately there are easier solutions already existing and investing in assurance vie is the most popular choice for this purpose. Conveniently, this is also the solution for providing personal tax-efficiency for you. There is a range of French products available, as well as international versions. In the main, the international products are generally more suited to expatriates as a much wider choice of investment options is available (compared to the French equivalent), as well as a range of currency options (including Sterling, Euros and USDs).
Exchange rates should not be overlooked. Currently, we are living in an environment whereby, for example, the Sterling Euro exchange rate is strong and so people are feeling fairly relaxed about this. However, it does not seem to be so long ago since the rate was close to parity. Unless you transfer your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) – which is too broad a subject to cover here – your pension income is always likely to be subject to exchange rate risk.
It is possible to have a UK State pension or US Social Security paid direct to your French bank account (and the exchange rate is usually very good), but this may not be the case for other pensions that you receive. Therefore, you should consider using a forex company, since these companies will usually give a better rate than banks.
It is very important to seek independent financial planning advice before making the move to France. A good adviser will be able to carry out a full financial review and identify any potential issues. This will give you the opportunity to take whatever action is necessary to avoid having to pay large amounts of tax to the French government, after becoming resident.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.
UK Pensions and Non-Residents
By Spectrum IFA
This article is published on: 18th August 2014
A couple of things have come out of the UK government’s office recently. Both are important, but for some expatriates, one of these is going to have a bigger impact than the other.
The first was the result of the consultation on the UK pension reform, which was published in July (and we can now expect a Pensions Bill in the Autumn). The outcome is that not much has changed from what had already been proposed, which you can read about in my previous article at https://spectrum-ifa.com/proposed-uk-pension-changes/
However, a couple of things have been fine-tuned. For example, the age from which you will be able to take your total pension pot as cash on the grounds of triviality will be possible from age 55, rather than the current age 60. Also for those who still prefer the security of a lifetime annuity, the rules will be changed to allow a longer guarantee period than 10 years but of course, this will reduce the amount of the annuity at start.
One important point that has been clarified concerns pension transfers from Final Salary Schemes to Defined Contribution Schemes (DCS). We now know these will still be allowed, but only from those schemes that are funded. Therefore, members of unfunded public sector defined benefit schemes will not be allowed to transfer their benefits to a DCS. This may not appear to be an issue – after all who would want to transfer their pension benefits out of such schemes? In effect, the government – or in reality, the UK taxpayer – underwrites the cost of these pension schemes.
Well this brings me to the second ‘thing’ …….
……. non-residents could lose their UK tax-free allowance on UK taxable income.
For those of you who have not already picked up this news, this is something that could come into effect in April 2015. A consultation has been launched by the government with a deadline of 9th October for interested parties to respond.
For French residents, this concerns those who are receiving public sector pensions, UK property rental income and/or UK earnings. If it comes into effect, the result will be that for a basic rate UK tax payer, unless your average tax rate in France is at least 20%, then your combined UK and French tax bill will be higher. This is because the method that is used to give relief from double taxation in France, limits the amount of that relief to the amount of French tax attributable to such income. Based on the 2014 rates, for a couple in France this would mean that they have to have combined taxable income of at least €112,000 per annum or for a single person, at least €57,000. If you are below this level, then you would be affected.
My initial reaction to the above was that those with public sector pensions are being treated unfairly. They cannot transfer their pension benefits out of the current scheme and so are forced to be subject to UK tax with the possibility of paying up to £2,000 a year more (based on UK 2014-15 rates), but they are unlikely to get the full relief from France. However, thankfully, the UK government has recognised that as the public sector pensions are, in theory, only taxable in the UK, then it is quite likely that entitlement to the personal allowance will be maintained.
Sadly, not so for property rental income (or earnings), as the UK government considers that people will usually be also liable to tax in their country of residence. However, the method of the calculation used to give relief from double taxation is identical for all these three categories of income, which is based on taking in to account the gross amount of income (i.e. before UK tax deduction). Had the previous method of calculating the relief still been in operation, there would not be any potential issue, since the calculation used the amount of income after deduction of UK income tax.
The other change that is taking place in the UK that affects non-residents who own property is the introduction of capital gains tax for properties sold after April 2015. When combined with the potential increase in UK income tax on any property rental income, this makes holding property for investment purposes a lot less interesting.
Are you affected by these changes? If so, please feel free to contact me if you wish to have a confidential discussion to see if your situation can be improved.
Now is also a good time to mention that we are taking bookings for our Autumn client seminars, which will be taking place across France – “Le Tour de Finance – Bringing Experts to Expats”. Our industry experts will be presenting updates and outlooks on a broad range of subjects, including:
- Financial Markets
- Assurance Vie
- Pensions/QROPS
- Structured Investments
- French Tax issues
- Currency Exchange
The date for the local seminar is Friday, 10th October 2014 at the Domaine Gayda, 11300 Brugairolles. This is always a very popular event and so early booking is recommended.
But if you are reading this further afield, you may be interested in attending one of our other events:
Wednesday, 8th October – St Endréol, 83920, La Motte, the Var
Full details of all venues can be found on our website at Le Tour de Finance
Places for our seminars are limited and must be reserved, in advance. So if you would like to attend one of the events or you would anyway like to have a confidential discussion about any aspect of financial planning, please contact me either by e-mail at daphne.foulkes@spectrum-ifa.com or by telephone on 04 68 20 30 17.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter
Are you a retired expat in Italy or thinking of retiring to Italy?
By Spectrum IFA
This article is published on: 29th July 2014
If your answer is “yes”, Then this information is important to revisit or think about
Expat guide to Money Management
Part 1: Your money and the cost of living
Maybe you have already relocated to Italy, or are seriously considering doing so. There are many factors which come into play. And nothing is more striking than how the change in the cost of living may impact upon you.
Add to this, changes in other areas – for example climate, salary and social life – all of these will have an impact on a successful stay/move – but the most vital one is to make sure you have control over your living expenses.
Adjusting to how much things cost relative to what you are used to is a key part of expat life and forewarned is forearmed!. The World Bank conducted an exhaustive survey and in its report highlighted the fact that food, housing, energy and healthcare costs continue to account for as much as 89% of annual spending, regardless of your location. It’s therefore vital that your day-to-day financial planning takes this into account, regardless of whether you’re employed, self-employed, looking for work in your new location or even retired or retiring.
I have experienced this myself since moving to Italy, especially insofar as the delicious Italian cuisine is concerned. Fortunately my wife has tracked down a tailor to make my trousers larger, but now I have the added expense of having to employ a personal trainer, something I never thought about in my prior planning on moving to Italy!!
Calculate what you’ll need in advance
If you are planning a move, then you need to know how much money you will need in order to have an equivalent lifestyle to the one you currently have. Also, you will need to gauge comparisons in the housing market as to property prices and/or rentals depending on your “mode of habitat”.
A personal tip: You can do this on the internet by looking at housing agencies and rental companies but you will find, 99 times out of a 100, accommodation at much lower prices if you just come to Italy for that purpose. Our quest via the web was frustrating as most agents have virtually the same properties on their books. But by coming to Italy ourselves (Lucca) we visited a few smaller operations and came away with exactly what we wanted at a rental 30% less than we found on the internet.
And do not forget other “miscellaneous” expenses such as buying a car, removal costs and very high motor car insurance premiums which need to be paid up front – only 6 or 12 months in advance – no monthly payments – and that premiums will reduce yearly as your stay in Italy lengthens.
Consider medical insurance
Healthcare is “non-negotiable” even if you qualify for the Italian state medical protection. As was pointed out in the information regarding finding accommodation on the web, rates quoted are generally quite expensive, but by speaking to a “local” agent/broker (usually with the aid of a translator) much lower rates can be obtained. This also happened in our case.
Think of the small additions
Other additional living costs may include employing a driver or domestic staff where relevant, and joining certain clubs to participate in expat social or business life. And then there is the cost of maintaining assets based in your native country. If your house is let out, for example, management fees will need to be paid to a letting agent.
Book a financial review
Consult a wealth consultant/adviser who can talk you through the opportunities available as an expat and find out why you should book a financial planning review
Are you thinking about starting a pension in France?
By Amanda Johnson
This article is published on: 15th July 2014
I have been working in France for several years and feel I should now be looking at long terms plans & pensions, but don’t know where to start. Can you help me?
There are many people who, like myself, have come to France to work. Once your business is established it is sensible to start to think about your longer terms financial goals:
- At what age would I lie to retire or reduce the number of hours I am working?
- What UK pension can I expect to receive bearing in mind I am no longer paying National Insurance contributions?
- What can I do with any private UK pension pots I have from my time working in the UK?
- How much income do I think I will need once I retire in France?
- What can I do to maximise my income & minimise my tax when I retire?
A free financial consultation will allow us to cover all of the above questions and look at options based on your personal circumstances, which will allow you to best plan ahead. Several small decisions now, can make a great difference to your future quality of life.
There are no consulting fees for providing you with advice or ongoing service. Our Client Charter outlines how we work and what you can expect from us. Please do not hesitate to ask for a copy of this.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
QROPS Pension Transfer
By Chris Webb
This article is published on: 4th July 2014
If you ever worked in the UK, no matter what your nationality, the chances are you were enrolled in a private pension scheme. The UK government continues to tweak legislative changes affecting the expat’s ability to move this pension offshore. On the surface, these changes appear to limit transfer options, but in reality they have strengthened the legal framework offering expats continuing advantages.
Background
When you leave the UK, if you have a Final Salary pension, then your fund remains valid but is deferred and any increases will usually be limited to inflation until you reach retirement age. The pension income you then receive is taxable in the UK no matter where you are based in the world, you may be entitled to a tax credit if there is a Double Taxation Treaty in the country you reside. Once you die the pension will continue in the form of a spouse’s pension if you are married; otherwise it will cease. When your spouse dies, all benefit payments come to an end.
With a personal pension, if you take any part of your fund and then die before you fully retire, a lump sum can be paid to your spouse. Although this is exempt from inheritance tax there is a special lump sum benefits charge, also known as “death tax”, payable on the remaining fund. This is at the rate of 55% of the benefit amount, although the recent budget changes have advised that this is likely to be reduced in the near future.
In April 2006 Her Majesty’s Revenue and Customs (HMRC) introduced pension ‘A’ day. This liberalised UK private pensions and allowed people leaving the UK to transfer them overseas, often to a new employer. In doing this the UK complied with European legislation which allows all citizens the freedom of movement of their capital. Thus ‘Qualified Recognized Overseas Pension Schemes’ (QROPS) were born.
Implementation
QROPS are not necessarily the right thing in every single case. In order to decide whether it would be advantageous to transfer your pension or leave it in the UK, with the intention of drawing the benefits in retirement, please contact me so that I can carry out a personalised evaluation. There may be compelling arguments, outside of the evaluation alone, which are often overlooked and may affect you in the future.
One of these is that a large number of UK schemes are currently in deficit to the point that they will be unable to pay future projected benefits. This would mean that even though it looks as though there are arguments to leave your UK pension in situ it may actually be wiser to transfer it.
In order for you to make the best decision you need professional advice on what would be the best solution for you. This will entail seeking details of the current UK schemes, including transfer values, the types of benefits payable to you and options going forward when you get to a retirement date and when you die.
I have detailed below some advantages & disadvantages of a QROPS pension transfer, using the jurisdiction of Malta as a reference point.
Advantages
1. Lump Sum Benefits
If you transfer your benefits under the QROPS provisions to a Malta provider, in accordance with the rules of this jurisdiction, you may be able to take a pension commencement lump sum of up to 30% (unless you have already taken this lump sum from the UK pension). Under the current HMR&C (Her Majesty’s Revenue and Customs) rules to qualify for the lump sum option you must be age 55 or over. Your remaining fund is then used to generate an income without having to purchase an annuity. The 30% pension commencement lump sum is only available once you have spent 5 full consecutive tax years outside of the UK (in terms of tax residence), if you are within the first 5 years, we strongly advise you to limit the pension commencement lump sum to 25%.
2. No Liability to UK Tax on Pension Income
A non UK resident drawing a UK pension remains subject to UK tax on the income, unless he or she resides in a country that has a Double Tax Treaty (DTT) with the UK, which contains an article on pensions that exempts the pension from UK income tax. Transferring under the QROPS provisions ensures that, if tax is due on pension income, it will only be taxable in the country of your residence.
3. No Requirement to Purchase an Annuity
There is no longer a requirement to ever purchase an annuity with either your UK pension or in the event you make a transfer under the QROPS provisions.
Whilst the UK Government changed its pension rules in April 2011 so that you can now delay taking your pension indefinitely, in the event of your death after age 75 you are treated as if you had already taken benefits (whether or not you have actually done so) and there would be a 55% tax charge on the funds paid out to heirs. With a Malta QROPS there is still no need to purchase an annuity, however you must start to draw an income from age 70. The Pension commencement Lump Sum must be taken by this age or the option to take it after this age is lost.
4. Secure Your UK Pension Pot
Some defined benefit schemes in the UK are in deficit. Since the deficit forms part of the balance sheet of the company, this can present a huge risk to your pension fund. Transferring your UK benefits under the QROPS provisions could enable you to have full control of these funds without worrying about the financial situation of your previous employer.
5. Ability to Leave Remaining Fund to Heirs
Standard UK pension legislation significantly restricts the member’s ability to leave the pension fund to their heirs on death, except if death occurs before age 75 and no benefits have been paid to the member. Otherwise if a member has started to draw benefits prior to age 75, the remaining fund can still be paid as a lump sum to heirs, but less a tax charge equal to 55% of the lump sum (increased in April 2011 from 35%). If the member dies after age 75, then the tax charge remains at 55% (reduced in April 2011 from 82%) whether or not the member has received any benefits.
A transfer under the QROPS provisions will allow the member to leave lump sums without deduction of tax to heirs as can be seen more easily from the table below.
UK Pension
| Age | Benefits from Pension | Tax On Death |
| 55+ | PCLS | 55% |
| 55+ | Income* | 55% |
| 55+ | PCLS & Income** | 55% |
| 55+ | No PCLS, No Income*** | 0% |
| 75+ | PCLS, Income or nothing | 55% |
QROPS – Malta
| Age | Benefits from Pension | Tax On Death |
| 55+ | PCLS | 0% |
| 55+ | Income* | 0% |
| 55+ | PCLS & Income** | 0% |
| 55+ | No PCLS, No Income*** | 0% |
| 75+ | PCLS, Income or nothing | 0% |
PCLS – (Pension Commencement Lump Sum)
This table is based on the aim of paying out the remainder of the pension fund as a lump sum death benefit. There may however be other options than providing a lump sum death benefit.
*This is based on the remaining lump sum being paid out as a death benefit. A spouse could transfer the pension into their name and continue the income drawdown.
**There is an option of phased drawdown where you could take part of your PCLS allowance and part income. The remaining portion of the fund that you have not taken the PCLS or income from could continue to be paid out with no tax up to the age of 75.
***There will be no tax up to the age of 75 if you have not taken any benefits from your plan.
6. Currency
A standard UK pension will usually only be invested and pay benefits in Sterling, which means the member runs an exchange rate risk in respect of pension income, in addition to incurring charges in converting the pension payments to the currency of their country of residence.
A transfer under the QROPS provisions means that the pension payments can be made in the local currency, thus potentially eliminating exchange rate risk
7. Lifetime Allowance Charge (LTA)
This is a restriction on the total permitted value of an individual’s total accrued fund value in UK registered pensions, currently £1.5m. Those who exceed this value face a potential tax liability of 55% on the excess funds on retirement at any time when there is a “benefit crystallisation event” that exceeds the LTA. A benefit crystallisation event is any event which results in benefits being paid to, or on behalf of, the member and so includes transfer values paid to another pension scheme, as well as retirement benefits.
The UK Government have advised that the LTA will be reduced to £1.25m from 6 April 2014. (This was reduced in 2012 from £1.8m to £1.5m).
There is no LTA within a QROPS so transferring larger plans to a QROPS may not be caught in this reduction in the future. Careful planning will be needed with your adviser if you are close to the limit in the UK.
Disadvantages
1. Charges
If you have a pension(s) with a combined transfer value of less than £50,000 then the charges may be prohibitive.
2. Loss of Protected Rights
A transfer under the QROPS provisions may result in the loss of certain protected rights, including Guaranteed Annuity Rates, Guaranteed Minimum Pension, a protected enhanced lump sum, or rights accrued under a defined benefit scheme. (These are shown in the section “Analysis of Your Existing Pensions”).
3. Returning to the UK
If you return to the UK, then the QROPS administrator will have to report this ‘event to HMRC and the pension scheme will become subject to UK pension regulations again.
If it is your intention to return to the UK in the near future then a transfer under the QROPS provisions is usually inappropriate.