QROPS
and pensions: advice for expats
British expats abroad can now get more control over their pension’s
plans, thanks to new rules that remove many restrictions for people who retire
overseas.
They can pay lower tax on income drawn from a relatively new form of
pension, avoid being forced to invest capital in an annuity which dies with the
purchaser and pass their wealth to friends and family free of tax on death.
Needless to say, these important new opportunities are subject to
extensive legislation, which will be discussed in detail later. However, the
important point for now is that a Qualifying
Recognised Pension Scheme (QROPS)
You can receive valuable tax reliefs while working and saving toward
retirement in the United Kingdom, without needing to pay higher taxes when you
draw benefits or submit to UK restrictions on how you invest and spend the fund
What
is a Qualifying Recognised Overseas Pension Scheme (QROPS)?
As its name suggests, this is a form of pension based
outside the UK which is recognized by
the British authorities as being eligible to receive transfers from registered
UK pensions. Reputable advisers will only recommend transfers to
countries which provide consumer protection equivalent or greater than the
safeguards in the UK.
People who are living inside or outside the UK can
transfer their deferred company and personal pensions to a QROPS. Any pension
can be transferred as long as an annuity has not been purchased or, if it’s a
final salary scheme that the pension has not commenced.
Better still, where the pensioner has not been resident in
the UK for five complete and consecutive fiscal years – and the tax rules
determining residence will be examined in detail later in this guide – HMRC
restrictions on how income and capital are spent no longer apply.
For example, as set out in Clause 2 Schedule 34 of the
Finance Act 2004, there is no need to report what HMRC would regard as
“unauthorised payments” and tax of up to 82 per cent that might be levied on
such payments in the UK can be avoided. However, it is important to understand
this does not mean trust busting is acceptable.
Who might benefit from considering a QROPS?
Anyone considering retiring overseas and becoming resident
in a foreign jurisdiction or country for five years or more. The amount of tax
you pay on income and capital received from your QROPS will be determined by
the taxation of the country in which it is based and you are resident.
These laws or fiscal statutes vary from country to country
but many are more favourable to pensioners than those in the UK.
For example, pensioners resident in
Cyprus can opt to pay a fixed flat rate of five per cent tax on all income
above a small tax-free band or personal allowance; alternatively, they can
choose to receive a higher personal allowance and pay higher rates of income
tax on any income in excess of the allowance.
The best option for you will depend on your personal
circumstances and it makes sense to take professional advice which can take
account of your individual needs and objectives.
British pensions that can be
transferred to a QROPS include former employers’ occupational schemes (but not
final salary or defined benefit schemes already in payment); Superannuation
Schemes; Executive Pension Schemes; Self Invested Personal Pension Schemes (SIPPSs);
Small Self Administered Schemes (SSASs); Section 226 Personal Pension Schemes;
Section 32 Pension Transfers and Personal Pensions. You cannot transfer British
Government or State pensions to a QROPS.
Do I need to leave the UK forever to benefit from QROPS?
No. Rising numbers of people who decide to retire overseas
– perhaps to enjoy better weather and a lower cost of living – can take
advantage of a QROPS. You can continue to visit friends and family or return to
Britain for any reason, provided you remain a non tax resident of the UK. So,
you could return to the UK whenever you wish but the maximum length of time you
can spend in Britain will be limited before UK taxes apply.
For example, you must beware of the six-month rule and the
three-month average rule to avoid becoming resident in the UK again for tax
purposes and losing the advantages of QROPS.
If you are present in the UK for 183
days or more in any tax year – which starts on April 6 and ends on April 5 – or
you are present in the UK for an average of 91 days or more per annum, measured
over up to four years, then you may become resident in the UK for tax purposes.
But be careful because, these days, rules are not the law.
It is possible to remain a UK tax resident even if you spend less than 90 days
in the UK, so it makes sense to take advice that is specific to your individual
circumstances in this very tricky area.
Since April 6 2008, if an individual is present in the UK
at midnight, that counts as one day’s residence. In practice, days of arrival
in the UK are counted but days of departure are discounted. Where an individual
arrives and departs on the same day, this will not count as a day’s residence
for tax purposes
Are QROPS suitable for everyone?
No. Most British pensioners retire as UK residents and so
must pay UK tax. There is no statutory limit on the minimum value of pensions
that can be transferred to a QROPS but only funds worth more than £100,000 are
likely to generate sufficient tax savings to justify set-up costs, which vary
between one per cent and five per cent of the fund transferred.
Pensioners who have plans or policies with Guaranteed
Annuity Rates (GARs) higher than returns available today, may also find QROPS
do not justify giving up their GARs. As mentioned earlier, Government pensions
– excluding the National Health Service scheme - British State pensions and
final salary or defined benefit pensions already in payment cannot be
transferred to QROPS.
Why it makes sense to take specialist advice
Given the complexity and variety of different countries’
tax laws, this guide can only serve as a general introduction to the new
opportunities created by QROPS. Specialist financial advisers, who are
authorised in the UK and the country to which you intend to retire, can answer
questions specific to your individual circumstances.
Remember that the fundamental purpose of a pension is to
provide retirement income. So, it is vital to ensure that your money does not
run out before you do – and to avoid taking unnecessary risks with your income
or capital. For these reasons, it makes sense to consult fully-authorised,
specialist advisers before making any decisions about QROPS.
But the first step for most people will be to build up the
maximum pension they can within the UK’s tax rules, and this is the subject of
the next chapter.
Remember that the fundamental purpose of a pension is to
provide retirement income. So it is vital to ensure that your money does not
run out before you do
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