Is a QROPS Right For You?
Qualifying Recognised Overseas Pension Schemes are HMRC recognised pensions capable of receiving transfers of UK pension assets. QROPS can be useful for people living overseas that are no longer contributing to UK pensions and want enhanced pension freedom.
Anyone considering a QROPS should note that anyone without five full tax years overseas, or expats returning to the UK with a QROPS are classed as resident with a UK registered pension scheme, such as a Self-Invested Personal Pension (SIPP). However, there are many benefits to using QROPS in the correct circumstances.
Income Tax Benefits
It is possible for QROPS to limit taxation on income if the scheme member has lived outside of the UK for the 5 previous tax years and subject to DTA's (double-taxation agreements) in their country of residence. This does not avoid taxation however, and income tax may apply locally and/or where the QROPS is domiciled. It is crucial to consider tax obligations where you live and where income will likely be taken as DTA's vary.
Taxation on Death
QROPS can provide protection from UK inheritance tax (IHT) for non-UK residents on death, as the funds are no longer part of the member's estate can be received tax-free if the beneficiaries are not British tax resident. However, IHT rules may apply locally so it is always important to seek tax advice.
Final salary schemes seldom offer flexibility on death. A qualifying spouse is usually entitled to 50% of the benefits (sometimes rising to 66%) on the members death, but then cease on the death of the survivor (unless children remain under the age of 18 or age 21 and in full time education).
Transferring a DB pension helps avoid pension funds being lost on death of a surviving spouse. Beneficiaries can be selected by the member who can control how remaining funds are distributed. Proceeds will be taxed depending on residency.
Flexi-access provides an incentive to transfer defined benefit pensions. Usually, DB pensions offer an income starting at age 60 or 65, correlated to the member's final salary where employer and/or employee contributed to the scheme. Income increases in line with inflation and may offer a lump sum at retirement. If so, income thereafter reduces.
Using QROPS provides access to a lump sum of 30% from age 55 and the remainder can be taken as lump-sums or income. Taking large lump-sums may put you in a higher tax bracket, so always seek tax advice locally.
Transferring to a flexible schemes offers more control over investment decisions. As always, care should be taken to ensure assets are suitable as investment guidelines may differ from one provider to another.
The Overseas Transfer Charge
In March 2017 a 25% tax on QROPS transfers outside specific areas was introduced by the Chancellor of the Exchequer to promote fairness for members that have received tax relief but wish to take their savings elsewhere. Taxation of pensions had not seen much change since 2006 and transfers subsequently dropped.
Unless the QROPS and the individual are in the same country, both are within the European Economic Area (Liechtenstein, Norway, Iceland or EEA) or is an occupational scheme from the member's employer. Transfers are now taxed 25% at the point of transfer .
Following a transfer, payments from the funds within five tax years will incur taxation (if for example, the individual becomes resident in a country non-qualifying for exemptions), extending the reach of HMRC. The charge is reversed if criteria for a tax-free transfer once again apply within 5 years (eg. member returns to Norway, Iceland, Liechtenstein or the EEA and has a Maltese QROPS).
It is also important to consider the higher costs of QROPS compared to International SIPPS. Larger pensions can dilute the increased cost but smaller pensions may be limited to a range of portfolios selected by the trustee.
To speak to an expat financial advisor that will help guide you through a safe and secure pension transfer, contact us today and you'll get the help you need.