EXPAT PENSION TRANSFER BENEFITS
BENEFITS OF PENSION TRANSFERS USING A RECOGNISED OVERSEAS PENSION SCHEME
UP TO 30% TAX FREE LUMP SUMS COMPARED WITH 25% IN THE UK
The are pension transfer benefits to using an Recognised Overseas Pension Scheme rather than a UK pension scheme. With a UK pension scheme typically 25% can be taken as a tax free lump. With a ROPS you can be eligible to 30% as a tax free lump sum. The pension transfers benefits using a Recognised Overseas Pesnion Scheme can be vastly benificial to assisting your pension by tax benefit reduction and also pension planning for the future. Some of the Benefits of Pension Transfers Using an Overseas Recognised Pension Scheme means you can access a larger lump sum than that which would be available drawing down your pension in the UK.
THE LIFETIME ALLOWANCE
One of the pension transfer benefits of using an Overseas Recognised Pension Scheme is that if the Lifetime Allowance is exceeded the excess is taxed at 55% if taken as a lump sum or 25% if taken as income. There is still income tax to also be applied. So for a pension pot of £2,000,000 in 2016/17 for exceeding the LTA the pension holder will pay £550,000 to the HMRC for working hard and saving more for their pension. Transferring to a Recognised Overseas Pension Scheme avoids this penalty
INCOME TAXED IN COUNTRY OF RESIDENCE
A non-UK tax resident can request for pensions payment to be paid out gross. One of the Benefits of Pension Transfers Using an Overseas Recognised Pension Scheme are clients can transfer to a more favourable tax jurisdiction such as Malta, Isle of Man or Gibraltar. For example if your pension is held in Gibraltar the income tax rate there is 2.5%. So for a higher rate taxpayer that would have paid 40% at source on their pension in the UK now pays 2.5% saving 37.5%.
FINAL SALARY SCHEMES
A defined benefit, also known as a final salary scheme, is the most generous pension you can receive. The schemes have meant most close, restrict access or reduce benefits because as they are expensive to operate. If the pension scheme collapses or the employer becomes insolvent the UK Pension Protection Fund (PPF) takes over the scheme. The PPF is not Government backed and functions by charging a levy on pension schemes it looks after. 90% of your pension will be protected with a cap of £32,761 per annum. Larger pensions are impacted more by this. If you have a large pension passing this on to your beneficiaries is an option with a QROP’s as passing away with a final salary scheme your pension can die with you or your spouse may receive 50% of the payments. Benefits of Pension Transfers in this case would be you could protect your pension from UK Inheritance Tax.
NO INCOME TAX CHARGE ON DEATH- OUTSIDE THE SCOPE OF THE 45% TAX CHARGE
With a UK pension should a person aged below 75 pass away they can pass their pension to a nominated person tax free. If they die over age 75 there is a tax charge of 45% on passing this to the beneficiary. With a Recognised Overseas Pension Scheme the holder can take the benefits at 55 and pass on their pension upon death with no tax liability.
EXCHANGE RATE RISK
A good rule of thumb is to have income in retirement paid out in the country currency where you plan to retire. The constant changes in currency rates would leave the pension pot open to currency exposure and constantly changing rates meaning you could receive sufficiently less over time with each rate change.
WORLDWIDE INVESTMENT FUNDS AND STRATEGIES AND ONGOING ADVICE
A QROPS can be invested a huge range of investment funds across many different currencies using various fund platforms or offshore bonds. This gives the pension holder the chance to monitor and make these funds work harder rather than not closely monitoring the performance as many don’t do. The investment can be tailored to the investor’s individual needs. Is the money invested in the correct areas, and with the best Fund Managers or have highly regarded managers left the company as with Neil Woodfords decision to leave Invesco Perpetual. Transferring your pensions to a QROPS will bring your assets together and a wealth manager can help to advise and monitor the pension investments.
RETURNING TO THE UK (90% OF THE PENSION IS TAXABLE)
On returning to the UK if a person is drawing their pension from a ROPS in retirement then tax is only paid on 90% of the income. This is because it is classed as foreign income so less tax is payable.
PORTABILITY, FLEXIBILITY AND CONSOLIDATION
Recognised Overseas Pensions are designed for the 21 st century expatriate in that the government understands that hardly any people work for one company for their whole life and work in the same country anymore. With people picking up pensions in many different jobs before they leave the UK it can be difficult to keep track and monitor these pensions. ROPS allows the pension holder to consolidate all of the pensions under one roof so to speak and again make them work harder. ROPS gives the flexibility to tailor your pension for where you plan to retire to even if that’s the UK. A ROPS can be considered similar to a SIPP (Self Invested Pension Plan).
MAXIMISING A SPOUSES PENSION
With a UK pension if the pension holder dies the pension is usually passed to their spouse but at a reduced 50% rate until they die. With a ROPS it is possible to transfer 100% of the fund to provide a spouses pension. This may be through an annuity or income drawdown arrangement. Many people may wish to consider transferring to a QROPS to ensure the pension asset is able to provide a more substantial retirement income for their spouse.
With a ROPS its possible to retire and draw on you pension funds from the age of 55 which can be earlier than in the UK. The transferor has to be a non-resident from the UK for at least 5 years though.
PENSION INCOME TAX PLANNING
The income payable from a pension is fully taxable as income and is therefore taxable at a member’s highest marginal rate of between 0-45%.Is using a QROPs this can be limited to 2.5% if utilising the correct country to invest the pension pot
INHERITANCE TAX (IHT)
If a client is planning on never returning to the UK and lose their Domicile of Origin this can help them in not having to pay Inheritance Tax. The person would have to take legal advice from a professional but a ROPS is an ideal vehicle as it takes your pension out of the UK. All ties have to be cut to enable this but many people are doing this and enjoying better retirements in cheaper countries
EARLY RETIREMENT FROM A FINAL SALARY SCHEME
Final Salary Schemes often have q early retirement penalties for those who wish to draw their pension before the normal retirement age. Typically a scheme may impose a penalty, known as an actuarial reduction, of 0.5% per month. This means if you retire 12 months early the penalty is a 6% reduction in your annual pension income. If you retire 5 years early the penalty increases to 30% of your annual pension If you are looking to retire early then transferring to ROPS is a big advantage.
UK PENSION LEGISLATION
The UK government is constantly changing the regulation of pensions, changing allowances and invariably taxing them more. Moving to a ROPS would avoid this as you would effectively just be managing a fund of your own for retirement. Judging by the last few years and the unexpectedness of the UK government they can continue to severely limit the benefits current ROPS owners receive. The UK has serious deficit in the pensions area and who know what changes they could make to deal with its deficit.
In the UK in the event of bankruptcy a court can order a charge against your pension. Hence when you start drawing this tax free sum and them part or all of your monthly income could be paid to a creditor. With a ROPS this would be outside of the jurisdiction of the UK so this would severely limit that option to reclaim monies back from your pension pot.
Courts can place a pension sharing order in the UK against your pension. With a ROPS it would be up to the trustees of the scheme to allow or deny this. Also if a client wishes to settle a cash amount agreed with an ex-spouse they could do this via a ROPS with much more ease.
WHAT CAN BE HELD IN A QROPS?
•Pension Assets •Cash •Alternative Investments •Land •Shares •Commercial Property •Investments
THINGS TO REMEMBER
If a pension holder has a large pension income that was to go into the Pension Protection Fund. For example if the holder was to receive £50,000 per annum on retirement then they would lose millions because the PPF would only protect up to a maximum of £32,761.07. The PPF is funded by a levy on pension schemes (which many are in trouble themselves) and the scheme is not guaranteed by the UK Government, its ability to make pension payments could be seriously troubled. By taking a ROPS and doing a cash equivalent transfer they take control of their own pension funds and removes it from the risk of the pension scheme going bust. Since their launch in 2006, the popularity of QROPS (Qualifying Recognised Overseas Pension Schemes), an HMRC-recognised overseas pension, continues to grow amongst expatriates and individuals considering a move overseas. Demand for QROPS has experienced annual growth – which looks set to continue throughout the future as the market continues to mature, and more people become aware of their considerable benefits. The recent ‘Pension Flexibility 2015’ changes to UK pensions have also had a limited but important impact on the 20 benefits of QROPS set out below.