RH: In short, yes it is. On 5 April 2006, a brand new pension regime was introduced to the UK known as ‘A' day. This new regime dramatically simplified the complex world of the UK pension which had impact on, not only UK residents holding UK pensions, but those that had accumulated UK pension benefits and were now living abroad. All of a sudden these individuals were able to transfer these pensions away from the UK regime into what is known as a QROP or Qualifying Recognised Overseas Pension Scheme an overseas pension scheme into which UK pension rights can be transferred, recognised by HMRC.

The important point here is recognised. In order for you to be able to transfer your UK pensions to a QROP the overseas scheme must be approved and recognised by the UK tax office and, thus, be listed on their ‘approved' QROP list.

What are the advantages of transferring my UK pension to a Qualifying Recognised Overseas Pension Scheme?

RH: Well there are several, quite attractive, reasons why you may choose to do so.

First of all, you gain access to a much wider choice of investments and assets to allow your money to grow. At the moment, the equity markets are really suffering and are likely to continue to suffer. This is tricky for pension funds that will tend to make investment into ‘with profits' funds which undoubtedly will have equities as a constituent part of their underlying strategy. Perhaps you would like to have part of your portfolio in Physical Gold or non-stock market linked funds? All are possible with the QROP UK pension transfer vehicle.

A big selling point for using a QROP is the removal of the liability for the, recently introduced (2011), 55% tax charge that is imposed on all pensions once they are in payment. It used to be the case that the big tax advantage for using a QROP kicked in at 75 (inheritance tax advantages). However, as a consequence to changes in UK pension law in 2011, the tax advantage of using a QROP is now effective from 55. Who wouldn't want to save their dependents a 55% tax bill? This tax advantage, alone, can make the case for the use of a QROP extremely worthwhile.

QROPS also give higher levels of protection for your pension fund. Within the UK, there are compensation schemes and statute law that are there to protect a pension should the company or scheme administrator go into default. However, what few people realise is that this protection is limited and is further limited if your pension is not yet in payment. With the QROP structure you are transferring into a ‘ring-fenced' individual trust structure of which affords protection for your fund against wider scheme failure. Furthermore, the investments that are contained within your pension may benefit from higher levels of investor protection thank their UK counterparts.

Having no Income tax is another possible benefit. If you transfer into a QROPS domiciled somewhere like Guernsey, which charges no income tax on pension benefits, you are able to receive your pension payment free of income tax. Of course, you may have liability for local income tax depending upon where you are currently residing.

QROPS can help you gain a bigger lump sum. By transferring out of UK pensions to a QROP you can take a lump sum up to 30 percent of the value of your pension rights - five percent more than if you were to keep your pensions in the UK.

Removing currency risk is another benefit of the QROP vehicle. Let's say that you are now retired in France, and thus spending Euros: it would make sense to remove future volatility of income payments by having your pensions dominated in the currency that you are likely to use in the long term. Or, perhaps, you feel that one particular currency will offer you protection against other currency devaluation. Maybe you like the idea, for example, of having part of your pension dominated in Swiss Francs.

There have been many complaints, over the years, that pension providers are secretive in terms of their charges; making it difficult to understand exactly what it was that you were being charged and to understand the real ‘expense' to you as the pension holder. With a QROP the charging structure is completely transparent. You can see exactly what you are being charged and when. It could well be the case that your net cost will be lower by making use of a QROP vehicle.

Is there ever an argument for not transferring away from UK pensions into a QROP?

RH: Yes, there are, although in many situations the arguments are overwhelmingly in favour of transferring UK pension rights to a QROPS for non-UK residents.

The single biggest reason for not advising transferring away is if you are holding good defined benefit schemes. These are pension schemes which pay a pension income, at retirement, based upon your final salary. There could still be an argument for transferring out of a defined benefit scheme as you would enjoy all the features detailed above, however, there would need to be a careful consideration made of all the pros and cons of doing so.

As with any other financial planning matter, you should always seek professional advice as the decision to transfer to a QROP or not is dependent upon your particular, circumstances.

 


Russell Hammond is an Investment Specialist and senior financial adviser for AES International advising clients worldwide.