Expat Qualified Recognised Overseas Pension Scheme (QROPs)
What is a QROP’s?
A Qualifying Recognised Overseas Pension Schemes, or QROPS, is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC) as per UK requirements. A QROPS can hold the transfer of a UK Pension scheme in the vast majority of privately administered personal or corporate pension schemes. The pension scheme must also comply with the local pension’s legislation in its own operating jurisdiction.
Does a QROPS look right for you?
British Expats have two choices when it comes to managing an existing UK pension scheme:
Option 1: Leave the UK and retain your workplace or private pension with a UK provider and then upon retirement purchase an annuity to provide a pension for the rest of their life. As previously menstioned these are not the best at the moment due to low interest rates and the inability to pass the pension fund down to your wife or partner upon your death. This means the annuity in effect keeps the pension pot you built up over your lifetime.
Option 2: Transfer the UK pension funds into a QROPS. QROPS can provide an opportunity for people to unlock significant benefits from their pension, including enabling them to avoid tax in the UK by transferring their pension to a QROPS based in another jurisdiction. The benefit is that when you were a UK tax resident for every £1 saved to your pension the governement would offer tax relief to increase your contribution to encourage you to save for your retirement. For basic rate taxpayers its 20% and for higher rate taxpayers its 40%.
- When a basic-rate taxpayer, paying 20% tax, invests £100 into their pension, it only costs £80.
- When a higher-rate taxpayer, paying 40%, into their pension it would only cost £60.
- The amount that would’ve been in their monthly pay packet if they’d paid tax and took the money to spend and not contributed to their pension pot.
There are other alternatives and variants of course such as a SIPPs.
Lower Tax Benefits
If you were to keep your company or Defined Benefit pension and then buy an annuity which you are resigned to on retirement you would then pay tax on your monthly pension income at a rate of 20% or 40% determined by what rate of taxpayer you were upon retirement.
This is where transferring out to a QROPs has its advantages as you can place your QROPs in a jurisdiction that pays less tax than you would have done in the UK. Some jurisdictions have tax rates as low as 2% which means more of your pension staying in your hands.
Inheritance Tax Benefits
Upon the death of the pension plan holder the remaining QROP’s fund can then be passed to the beneficiary such as husband or wife tax free. Only upon the 2nd holders death would they need to plan for Inheritance Tax planning to pass this down to any children which this can be attained with the correct planning. If the pension holder had purchased an annuity they would offer a reduced amount of pension to the remaining spouse for a set amount of years. The norm is 50% of the initial pension holders yearly amount for 5 years although every pension is different with some better and most a lot worse.
Is financial advice required?
Yes, we recommend that any individual contemplating a pension transfer should take specialist advice prior to commencing the process to ascertain the benefits they will receive by transferring.
NOTE: “HM Revenue & Customs (HMRC) has announced that Qualifying Recognised Overseas Pension Schemes (QROPS) transfers for individuals not in the European Economic Area (EAA) will be hit with a 25% tax charge after 9th March 2017” .
Dependant on each individuals circumstances it can still be beneficial to pay the 25% charge and still transfer to a QROPs as the jurisdiction of the pension to be placed could have a 2% tax rate. If the individual is a higher rate tax payer at 40% they would still be saving 13% in income tax payments. On a larger pension pot this come become quite a substantial saving.
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