How changes to UK pension law can benefit expats
By Craig Welsh
This article is published on: 17th February 2009
Recent changes to UK pension legislation means that many expats can benefit from much greater flexibility at retirement using Qualifying Recognised Overseas Pension Schemes or QROPS.
Many UK Expatriates are unaware that changes to pension rules were brought in by the British Government to allow greater flexibility in transferring pensions and to remove some restrictions and regulations. A particular advantage to such a pension transfer to an overseas pension scheme can remove the requirement to purchase an Annuity and may have further tax advantages.
Introducing Qualifying Recognised Overseas Pension Schemes or ‘QROPS’
Since April 2006, individuals intending to leave or those who have already left the UK, and who have left behind private or work pension benefits can benefit from a QROPS Transfer. HM Revenue & Customs introduced QROPS “Qualifying Recognised Overseas Pension Schemes” which allows a non-UK resident to transfer their frozen pension outside of the UK and the restrictive pension rules.
This has led to many UK Expats contacting their advisers for further information on how to improve their retirement options. Pension transfers under QROPS are a tax-efficient way to greatly enhance pension opportunities. Leaving frozen pension in the UK has very restrictive tax rules for UK expats to consider, and we at Spectrum IFA have been advising expats across Europe on QROPS solutions that fit their individual requirements. In some circumstances however it may not be appropriate to transfer your pension, each case is treated on its merits and a full review is undertaken.
Does QROPS apply to me?
- If you answer yes to the following questions then it is worthwhile seeking a full expert appraisal of your pension benefits:
- Do you intend leaving the UK?
- Have you left the UK and are working overseas?
- Are you now living overseas and have pensions still in the UK?
- Would you like to understand more about QROPS?
What are the key benefits?
Annuities are generally unpopular because it means that you give up your capital, the amount that you have built up in your pension, less any tax-free cash you are allowed, to an annuity provider who will guarantee you a lifetime income. The annuity rate however reflects interest rates. Current rates are extremely low and have meant that many people have received much smaller pensions than they might have hoped for. If you were being forced to buy an annuity in the current climate you would definitely see why they are unpopular!
By transferring to a QROPS, there is no requirement to purchase an annuity and income can be ‘drawn-down’ from the fund. The following example illustrates the point simply;
| UK pension
|Value Value of pension fund at retirement||250,000€||250,000€|
|Cost of annuity purchase||250,000€||Nil|
|Capital remaining on death||Nil||250,000€|
With a QROPS approved scheme, the amount of tax-free cash available at retirement can be greater than the 25 percent allowed with a UK pension. This depends however on the jurisdiction used.
Inheritance tax planning
Most people would like to think that, upon their death, as much of their assets as possible would be passed on to their heirs. It is a complex issue, however, by transferring to a QROPS the taxation of pension benefits on death can be much less punitive. With a UK pension scheme for example, there could be a tax liability of up to 55 percent of the fund value before being passed on. By bringing the pension out of the UK and using a QROPS approved scheme, this tax liability can be greatly reduced, or even wiped out completely.
By moving an arrangement out of the UK, there can be a much wider choice of investments available to the pension fund, with a more global focus. Some existing pension schemes can be very restrictive in the choice of funds (UK only), or permitted investments.
This should be considered for expats who do not intend to go back to the UK, but with pension assets in Sterling. By transferring to a QROPS, the underlying investments and income payments can be denominated in a choice of currencies to reduce the risk of currency fluctuations.
Can any pensions be transferred into a QROPS?
Not all pensions can be transferred into a QROPS – a pension arrangement from which you are already taking benefits cannot be transferred. State pensions are also non-transferable into a QROPS. For all other schemes, a full and comprehensive analysis should be undertaken before deciding on suitability.
Above all, getting professional advice is crucial, as well as choosing the right jurisdiction in which to hold the QROPS and a suitably approved scheme provider.