What is an Expat Qualified Recognised Overseas Pension Scheme (QROPs)?
An Expat Qualified Recognised Overseas Pension Scheme, 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 mentioned 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 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 government 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.
Are there Lower Tax Benefits to using a QROP’s?
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 Qualified Recognised Overseas Pension 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.
Are there Inheritance Tax Benefits to using a QROP’s
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 a pension 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.
QROPS & tax efficiency
Currently, EU residents can transfer one or more UK pensions into a QROPS without taxation, while transfers outside the bloc attract the UK ‘overseas transfer charge’ of 25%. There are expectations the UK could extend this within the EU/EEA after Brexit, so time may be limited for tax-free transfers.
Once in a QROPS, funds are sheltered from UK taxes on income and gains. They also no longer count towards your lifetime pension allowance (LTA), so can grow unlimited without attracting LTA penalties of 25% or 55% when accessing your money.
While QROPS funds become taxable once you start taking benefits in your country of residence, many expatriates resident in Europe can receive favorable tax treatment.
QROPS funds only become taxable once you start taking benefits in your country of residence, but expatriates can usually receive favorable tax treatment.
QROPS & flexible access options
While UK pensions can be restrictive, many QROPS allow you to take as much cash or income as you like, however and whenever you want. You could, for example, draw a higher income in early retirement when you are most active and reduce it in later years. Or you could take a lump sum and preserve the rest for a rainy day or for future generations.
However, with this freedom comes more potential to exhaust your funds – unlike a UK annuity or ‘final salary’ pension which provide a guaranteed income for life.
QROPS & diversification and investment choice
QROPS usually offer more options than UK pensions for how your money is invested, and are not as over-exposed to UK assets. You can choose a flexible investment plan across a wide range of funds to suit your circumstances, objectives, timeline and risk appetite.
As the value of any investment can go down as well as up, this introduces an element of risk to your retirement funds that is absent from a guaranteed annuity. However, an active, well-diversified investment approach can manage and minimize risk.
QROPS & estate planning flexibility
While most UK pensions are only payable to your spouse on death, QROPS offers the option to include other heirs. So rather than dying with you or your spouse, your pension wealth could pass to any named beneficiary, even across generations.
QROPS may also offer some protection from UK inheritance tax when passing pension assets to non-UK resident heirs, although they may still be subject to local succession taxes.
QROPS & multi-currency options
While UK pensions only pay out in sterling, some QROPS allow you to invest your funds and make withdrawals in more than one currency. This is a major advantage for British expatriates living abroad as it reduces dependence on pound/euro exchange rates and removes currency conversion costs.
QROPS & freedom from UK rules… to a point
Funds in a QROPS are no longer governed by UK pension legislation, so are protected from future changes to UK rules. However, you could still be subject to UK legislation – and taxation – if you transfer funds again to an unapproved scheme within five tax years (for funds transferred after 8th March 2017), or if you permanently return to the UK within ten years.
Note also that the goalposts for QROPS are highly likely to shift in the future, especially after Brexit. Since their inception in 2006, the UK government has made numerous revisions to pension transfer rules and delisted thousands of QROPS from various jurisdictions. There is now far more complexity in the QROPS market than people realise.
Where HMRC deems that its rules have been broken, it can charge a 55% tax penalty on the transfer amount – potentially even if you had moved funds before the rules changed.
Is financial advice required when transferring a QROP’s?
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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